Non-deductibility of legal costs for directors’ criminal defence: the restrictive approach of the Italian Supreme Court (Corte di Cassazione)
The Italian Supreme Court (Corte di Cassazione), in Order No. 6636 of 20 March 2026, set strict limits on the deductibility of legal costs incurred by a company for the criminal defence of its directors and employees, confirming a restrictive approach to the business relevance of costs.
The principle of "qualitative" business relevance in legal costs for directors
According to the judges of the Italian Supreme Court (Corte di Cassazione), the assessment of business relevance under Article 109 of the Italian Income Tax Code (TUIR) is not quantitative but qualitative. This means that, to be deductible, a cost must relate to an activity potentially capable of generating profits.
In the specific case of criminal defence, the Italian Supreme Court (Corte di Cassazione) clarifies that the related costs:
- Serve merely to preserve the company’s assets, rather than increase them.
- Have no direct causal link between revenue generation and legal protection in criminal proceedings.
- The assumption of such costs cannot be classified as a transaction falling within the company’s objects.
The "common origin" and the intervening factor in assessing business relevance
A key aspect of the order concerns the so-called "common origin". Although it might be considered that, where criminal proceedings arise from a civil matter connected with the business activity (for example, unfair competition), the related defence costs are deductible, the Italian Supreme Court (Corte di Cassazione) rejected this argument.
The Court explains that an accusation made by a third party constitutes an "intervening factor" unrelated to the management mandate. Such action breaks the causal link between the business activity and the legal expense, making the latter non-deductible even where the defendant is cleared.
The burden of proof and document management for deductibility
Against this judicial background, protecting the company requires rigorous document management. In the event of a challenge by the Tax Authorities, the company bears the burden of proving in detail:
- The existence and nature of the cost.
- The facts justifying the expenditure.
- The actual allocation of the cost to industrial production, understood as an act serving the business activity.
Conclusions
The decision of the Italian Supreme Court (Corte di Cassazione) No. 6636/2026 requires businesses to review their welfare policies and policies on legal protection for their corporate bodies. The clear distinction between "business relevance" and indirect "benefit" requires a tailored approach to tax planning and litigation management, to avoid costs seemingly inherent in corporate life being added back to taxable income.
