Co-authored by Prof. Dr. Jochen Lüdicke and Tobias Pukropski
Tax questions rarely cross the desk of an antitrust practitioner, but when they do, things can get complex quickly – with significant implications for the companies involved. Best to involve a tax expert in these situations, like we have done for this post: We will report on a recent development with implications for companies involved in cartel damages litigation and take a short look at “typical” tax questions around antitrust.
VAT and cartel settlements
So far, it was rather unclear whether VAT is to be applied to the payment of cartel damages as a result of a settlement between the claimant and the defendant. However, the German Federal Ministry of Finance has recently clarified that settlement payments to compensate for cartel damages are to be classified as so-called “genuine damages” and therefore VAT does not apply.
With this mind, cartel damage payments are (now) to be treated as follows with a view to German VAT:
- Deductibility of input VAT: Injured parties can generally deduct VAT related to cartel-inflated prices.
- VAT-neutrality of damage payments: Cartel damage payments are not subject to VAT, as they are considered genuine compensation for harm suffered, rather than a taxable transaction or a price adjustment. The damage payments received are not to be treated as VAT-exempt but not subject to VAT, thus would not impact on the quota of vatable and VAT-exempt parts of the turnover, which could have an impact on the input VAT-deductions.
- Settlement payments and VAT: Settlement payments made to resolve cartel damage claims are also VAT-neutral, as they are not considered taxable remuneration.
Deductibility of cartel fines
While the tax treatment of cartel damages has become more straightforward, the deductibility of cartel fines remains restricted. Under German tax law, fines imposed for antitrust infringements are generally not tax-deductible as business expenses. This is because fines are seen as a penalty for unlawful behaviour rather than a cost incurred in the ordinary course of business.
Still, there may be limited circumstances where a portion of a fine could be deductible. If a fine is imposed to “skim off” profits obtained through cartel activity, the portion of the fine that relates to the skimmed profits might be deductible. However, the burden of proof lies with the taxpayer to demonstrate that the fine was indeed imposed to skim off profits.
Strategic implications
While often somewhat overlooked in the context of antitrust, tax rules can have significant implications for companies involved in cartel proceedings. In particular the following should be kept in mind:
- Easier settlements: The clarifications that settlement payments of cartel damages are VAT-neutral could make those payments easier to process in practice.
- No business expenses: The rules on the deductibility of cartel fines remain unchanged. Cartel fines generally cannot be deducted from tax as business expenses and are thus even more costly in practice than they seem at first.
- Strategic tax planning: Companies involved in cartel proceedings should carefully consider the tax implications of cartel damage payments and fines when developing their litigation and settlement strategies.
Conclusion
The clarification by the German Ministry regarding the treatment of settlement payments is a good reminder that tax, as in so many fields, also has its role to play in antitrust. When the big questions of a cartel proceeding or damages claims seem to have been decided and antitrust practitioners are on their way out, tax rules tell companies how payments are actually to be processed and treated in practice. All involved stakeholders must remain vigilant and take an expert look to navigate the complex interplay between antitrust and tax law.
Prof. Dr. Jochen Lüdicke is a founder and managing director at German law firm Lüdicke & Kollegen. He primarily advises family entrepreneurs, family-owned businesses and financial service providers and is active in tax court proceedings. His particular areas of expertise are succession planning, capital investments, corporate finance and tax proceedings before German and European courts.
Post photo by Alexander Mils on Unsplash
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