Constitutional Court Holds that EU Cartel Fines Are Not Tax Deductible

In a preliminary reference of 20 December 2012, the Belgian Constitutional Court (“Grondwettelijk Hof/Cour constitutionelle”) held that EU cartel fines cannot be considered as a business expense which is deductible from corporate tax bills.

The preliminary reference to the Constitutional Court was made in the context of a dispute between chemicals manufacturer Tessenderlo Chemie and the Belgian tax authorities (see VBB on Competition Law, Volume 2012, No. 10, available at www.vbb.com). In particular, Tessenderlo Chemie had treated as a deductible business expense the fine of EUR 83.7 million imposed by the European Commission for Tessenderlo Chemie’s role in the animal feed cartel (Commission Decision of 20 July 2010), but the Belgian tax authorities rejected this deduction. This dispute led to litigation before the Brussels Court of First Instance.

In the course of the proceedings, the European Commission sought leave to intervene as an amicus curiae and submitted observations. The Commission argued that any interpretation of the Belgian Income Tax Code that would allow competition fines to be deducted in whole or in part from taxable income would run counter to EU law. According to the Commission, the tax deductibility of the fine would undermine its deterrent character. The Commission’s intervention and submission follow an earlier similar move in Dutch tax proceedings in which it had also argued forcefully that competition fines should not be tax deductible under Dutch law. That case gave rise to a preliminary judgment of the European Court of Justice (ECJ) which recognised that the tax deductibility of a competition fine may impair the effectiveness of such a fine and, accordingly, justified the Commission's intervention before the Dutch court to take a stance against such deductibility (C-429/07, judgment of 11 June 2009, Inspecteur van de Belastingdienst v. X BV – See, VBB on Competition Law, Volume 2009, No. 6, available at www.vbb.com ).

At the same time, the Brussels Court of First Instance made a preliminary reference to the Constitutional Court essentially asking whether EU cartel fines can be deducted from tax liability as a business cost.

The Constitutional Court delivered its ruling on 20 December 2012 and, following the European Commission's argumentation, held that allowing companies to deduct EU cartel fines from corporate tax bills would reduce the effectiveness of the EU rules in prohibiting cartels and other anti-competitive behaviour. As EU Member States are under an obligation to safeguard the effectiveness of these EU rules (Articles 4(3) TFEU), the Constitutional Court concluded that allowing cartel fines to be deducted would not be compatible with EU law.