GER: Can Fines Be Used for Tax Reductions?

May 16, 2025 Benn-Ibler Rechtsanwälte

Criminal fines are not work-related expenses. This was ruled by the German Federal Fiscal Court (Bundesfinanzhof, BFH). However, if a fine serves as compensation or if the proceeds of the crime are recovered as criminal assets, this is a different matter.

In the case at hand, a business owner had taken legal action against the tax authority. He and his wife ran two businesses in the telecommunications and catering industries, and he had been charged with tax evasion and withholding wages. The competent regional court provisionally discontinued the proceedings on the grounds that the case was not grievous. However, the business owner was required to pay a fine of EUR 25,000.

To save on income tax, he subsequently deducted this fine as an operating expense. However, in his 2018 income tax assessment, the defendant tax office refused to allow the deduction. His appeal was rejected as well. Through this legal action, the claimant sought recognition of business expenses totalling approximately EUR 23,000, as this fine was essentially recovery of stolen assets.

According to Section 12, No. 4 of the German Income Tax Act (Einkommensteuergesetz, hereinafter EStG), fines imposed in criminal proceedings, other legal consequences of a financial nature where the punitive aspect is predominant, as well as payments made to fulfil regulations or provisions cannot be deducted from taxable income.

However, fines that serve to compensate for a criminal actions are, according to Section 12(4) of the EStG, exempt from this rule and are allowed for deduction.

BFH X R 6/23 (29 January 2025)