Deductibility of punitive damages: unsuccessful appeal before the CAA
Article 39 of the General Tax Code prohibits a business from deducting from its taxable income "[f]inancial penalties and fines of any kind imposed on those who violate legal obligations are not deductible from taxable income."
In a decision by the Tax Plenary Session on December 8 of last year, the Conseil d'Etat the extent to which this provision applies to payments of punitive damages (Council of State, Tax Plenary Session, Dec. 8, 2023, No. 458968, Lebon).
It had then clarified that, in principle, "a financial penalty imposed by a foreign authority for failure to comply with a foreign legal obligation" was not deductible. It had nevertheless indicated that, as an exception, such a penalty was deductible if it "was imposed in contravention of the French conception of international public policy." It then referred the case to an administrative court of appeals.
The court then had to determine whether, in this case, the penalty assessed against the company that had been subject to a tax audit met the above conditions.
It will first determine that, in this case, the imposition of the sanction does not violate the principle of proportionality of penalties set forth in the Declaration of the Rights of Man and of the Citizen, nor the right to respect for private life protected by Article 1(1) of the European Convention on Human Rights.
In this regard, she notes that:
if the amount of the penalty imposed exceeds the damages suffered by the other party, it considers that "given the extent of the damages suffered by [the other party]—nearly $4.8 million—and the nature of the [taxpayer] company’s violations, the penalty imposed on it, capped at $5 million, is not disproportionate.”
if the amount of "compensatory damages" exceeds the actual loss suffered, this "is not sufficient to constitute such a disproportion within the meaning of the fundamental principles of French law."
If the application of French or European rules prevents the award of such an amount, this does not prove that the amount of "compensatory damages" would be excessive.
The Court will then find that the proceedings leading to the imposition of the sanction did not violate the requirements of a fair trial or the rights of the defense, noting that:
"Even though the jury’s decision—which ultimately led to the conviction—was not accompanied by a written statement of reasons, the company‘was able to fully understand the grounds for the conviction and the amount of the fine, to effectively challenge those grounds before professional judges at both the trial and appellate levels, and to receive a reasoned response to all of its objections’."
The fact that the jury of the disciplinary committee acknowledged the involvement of all parties and allowed for criticism of its analysis does not demonstrate a lack of impartiality on its part.
The Court therefore concludes that, in this case, the sanction imposed by a U.S. court does not conflict with the French conception of international public policy.
CAA Versailles, Sept. 25, 2025, No. 23VE02737
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