The case
In its 2016 corporate tax return, A. Ltd. claimed a warranty provision of CHF 7 million concerning potential warranty liabilities arising from a major construction project involving the expansion of an industrial facility. The company participated in the project through a joint venture. The Tax Administration of the Canton of Berne denied the deduction, concluding that the provision was not commercially justified and added the amount back to the company’s taxable profit. After unsuccessful proceedings before the cantonal authorities, the company appealed to the Swiss Federal Supreme Court.
The commentary
The case concerned the conditions under which warranty provisions for future warranty obligations may be recognised for tax purposes, particularly in the context of large-scale projects involving numerous individual risks, each of which has only a low probability of materialising.
The Federal Supreme Court stated that where a project gives rise to many individual risks, the assessment cannot be confined to the likelihood of each individual defect occurring, but that the cumulative risk arising from all potential warranty claims must also be considered. By failing to consider this overall risk exposure, the lower court had applied federal law incorrectly.
The Supreme Court set aside the challenged decision and remitted the case to the Administrative Court for reconsideration considering the required overall risk assessment.
The judgment provides important clarification on the tax treatment of warranty provisions, confirming that such provisions may be recognised where the aggregate risk of future warranty claims makes an outflow of economic resources probable, even if the probability of any individual claim is relatively low.
