Contractual penalties: deductible only if consistent with economic rationality

With order no. 12400 filed on May 3, 2026, the Supreme Court of Cassation has once again outlined the boundaries of business cost inherence, focusing specifically on the deductibility of contractual penalties for breach of contract (pursuant to Art. 1382 of the Civil Code).

Although such charges are generally deductible, the Supreme Court clarifies that the recognition of the cost is not absolute: in fact, the Tax Authorities could disallow it should a manifest lack of economic viability of the operation emerge.

The principle of inherence and the limit of non-economic viability

Inherence must be assessed in a qualitative sense, as a correlation between the cost and the business activity, regardless of immediate utility or the quantitative amount of the expense. However, the judges specify that within the scope of contractual penalties:

• Office audit: the tax authorities may intervene in the presence of clearly non-economic behavior, where the disproportion between expenditure and derived utility indicates a lack of inherence;

• Burden of proof: if the Revenue Agency provides serious, precise, and consistent evidence regarding the disproportion or illogicality of the penalty, it is up to the taxpayer to demonstrate the economic rationality of the management choice.

Difference between compensatory penalties and punitive sanctions

The Court of Cassation reaffirms a fundamental distinction in terms of deductibility between different types of outlays related to contractual penalties:

• Deductible costs: these are sums paid for delays or contractual breaches that do not have a punitive purpose but a compensatory one. They represent a "productive factor" connected to normal business life.

• Non-deductible costs: pecuniary sanctions aimed at punishing unlawful behavior or violations of mandatory rules (such as antitrust sanctions) remain non-deductible, as their deduction would neutralize their punitive function, turning it into a tax saving.

The case: disproportion and corporate ties

In the case covered by the order, the Revenue Agency challenged the deductibility of contractual penalties agreed upon without real economic substance and for extra-corporate purposes. The critical elements included:

• The transfer of business risk between the parties in derogation of normal commercial practice.

• The existence of a single center of economic interest between the contracting parties, confirmed by a subsequent merger operation.

In summary, the deductibility of contractual penalties is permitted as long as they remain within the scope of logical management choices. Should the agreement appear unreasonable or functional to purposes other than the core business, the risk of tax recovery due to lack of inherence becomes concrete.

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