When Tax Savings Turn Into a Criminal Matter

Two sets of accounts, two financial realities: one for internal use, the other for the tax authorities. This practice may, wrongly, appear to be a management ‘trick’ in certain small organisations or family businesses. In Switzerland, however, it exposes the company and its managers to serious tax and criminal liability, particularly when it is used to conceal turnover, understate taxable profit or hide assets.

The issue regularly features in international news, particularly with warnings from tax authorities against ‘dual accounting’. For Swiss SMEs, the stakes are very real: accounts that do not accurately reflect the business’s activities can lead to a tax reassessment, interest charges, a fine and, in the most serious cases, criminal proceedings. In a family business, where personal and business finances can sometimes become intertwined, the line between administrative disorganisation and fraudulent behaviour must be taken seriously.

‘Two sets of books’: not an alternative accounting method, but a tax red flag

First, we must distinguish between two concepts that the terminology can make confusing. Double-entry bookkeeping is a standard accounting method and, for many businesses, a legal requirement. It is based on the symmetrical recording of transactions: every entry has a corresponding counter-entry. According to the research report, public limited companies (SA), limited liability companies (Sàrl), as well as sole traders and partnerships with an annual turnover exceeding 500,000 francs must maintain double-entry accounts, in accordance with the requirements of the Swiss Code of Obligations as outlined by bexio.

Double accounting, however, refers to something entirely different: the maintenance of two divergent financial systems. One shows reduced activity to the tax authorities; the other reflects the economic reality for the director, the owner family, a business partner or a bank. In this scenario, the problem is not the existence of internal statements, budgets, margin reports or management documents. A company is perfectly entitled to produce management reports that differ from its statutory accounts, provided they are based on consistent data and are not used to distort the tax return.

The risk arises when the figures no longer tell the same story. If sales revenue is not recorded in the official accounts, if certain expenses are artificially inflated, if assets remain off-balance-sheet or if a parallel cash flow funds undeclared distributions, the company is no longer merely guilty of administrative irregularities. It enters the realm of tax evasion or tax fraud, depending on the circumstances and the methods used.

Tax evasion or tax fraud: the difference often lies in the evidence

In Swiss tax law, the distinction between tax evasion and tax fraud is crucial. Put simply, tax evasion involves reducing the tax due through an incomplete or inaccurate tax return. Tax fraud involves an additional element, notably the use of falsified or inaccurate documents to deceive the tax authorities. The case file refers to the Federal Act on Direct Federal Tax, in particular Articles 175 et seq., as well as the corresponding provisions of the Act on the Harmonisation of Direct Taxes of the Cantons and Municipalities.

In the day-to-day operations of an SME, this distinction can be tricky. An accounting error, an incorrect breakdown between private and business expenses, or a missing supporting document does not automatically constitute fraud. However, the existence of a parallel, organised and sustained system changes the assessment. The more internal documents a company has showing actual revenue that differs from that declared, the greater the risk of criminal charges being brought.

The financial penalties can be severe. According to PBM Avocats, in cases of negligent tax evasion, the fine can amount to between one-third and one-half of the tax evaded, along with a tax reassessment covering a 10-year period and default interest. Tax fraud, where it involves the use of forged documents, can be punishable by a prison sentence of up to three years, according to the same source.

Since 2016, an additional threshold has come to the attention of company directors: again according to PBM Avocats, tax fraud resulting in an evasion of more than 300,000 francs per tax period constitutes a serious tax offence, regarded as a predicate offence to money laundering. For a company with high turnover or one that has engaged in irregular practices over several financial years, the issue then extends beyond mere dealings with the tax authorities.

In family-run SMEs, informal practices can quickly become vulnerabilities

Family-run businesses are not immune to these risks. On the contrary, their operations often rely on trust, speed and close ties between managers, staff and family members. These qualities can become vulnerabilities when accounting rules are treated as a secondary formality. Advances between the company and shareholders, the company paying for private expenses, cash withdrawals or sales collected directly must be properly documented and accounted for.

The temptation may arise from a simple line of reasoning: ‘We know what the company actually earns, but we declare less to preserve cash flow.’ This is precisely the mechanism behind double accounting. In the short term, tax liabilities appear to decrease. In the medium term, the company accumulates an invisible liability: back taxes, interest, fines, legal fees, loss of credibility with a bank or investor, tensions between partners and personal risks for those in charge.

The problem becomes even more complicated when the official accounts are used by third parties. A bank financing a company, a prospective buyer scrutinising its figures, a partner relying on its financial statements, or an employee interested in profit-sharing all expect a reliable picture. Accounts that are understated for tax purposes but accurate for internal use create a contradiction: either the tax documents are false, or the documents provided to third parties do not match the official accounts. In both cases, the company’s governance is undermined.

Nor should family discretion be confused with a lack of obligation. A company remains a separate entity from its owners. Even in a structure owned by a single family, the accounts must make it possible to trace transactions, justify journal entries and understand how the profit or loss was arrived at. This traceability is not only useful to the tax authorities; it also protects directors should an issue arise several years later.

Internal documents are permitted, provided they do not present a different version of reality

One point is worth emphasising: producing multiple financial documents is not in itself prohibited. An SME may maintain a forecast budget, a sales dashboard, a cash flow analysis, margin calculations by project or by point of sale, or even reports intended for management. These tools are even recommended where they improve management control.

The line is crossed when these documents are based on actual transactions deliberately excluded from the official accounts, or when they secretly adjust figures declared to the tax authorities. An internal spreadsheet listing unrecorded receipts is not merely a management tool; it can become evidence against the company. Similarly, deleted invoices, sales not processed through the till or bank accounts used outside the accounts can turn a tax audit into a criminal case.

To minimise the risk, SMEs would be well advised to organise their processes before a problem arises. The most effective measures are often simple, but require discipline:

• centralise supporting documents and avoid making business payments from personal accounts;
• regularly reconcile the till, bank accounts, invoices and receipts;
• document financial dealings with shareholders, partners and relatives;
• clearly separate management accounts from tax accounts, whilst ensuring they are consistent;
• have sensitive accounting entries reviewed by an accountancy firm or a tax specialist.

These measures are no substitute for a case-by-case analysis, but they do create a clear audit trail. In the event of an audit, a company able to explain its cash flows and produce supporting documents is in a very different position to one that has to reconstruct its figures after the event.

Rectifying issues early generally costs less than correcting them under pressure

When an irregularity is identified, the wrong instinct is to wait. The more financial years that pass, the more the potential amounts, interest and procedural consequences can mount up. The first step is to establish the facts: which periods are affected, which taxes, what amounts, what documents exist and who made the decisions. This analysis must be carried out with care, ideally with the help of a professional, as the words used and the steps taken may have legal implications.

It is also important not to destroy, alter or ‘clean up’ documents after the event. An accounting adjustment must be traceable and justified. Attempting to erase the traces of a parallel system increases the risk rather than reducing it. In some cases, a tax adjustment may be considered, but its conditions, effects and appropriateness must be carefully assessed depending on the specific situation, the canton and the taxes concerned.

For business leaders, the message is therefore less a moral one than a strategic one: reliable accounting is not just a legal obligation; it is a safeguard for management. It enables you to ascertain the actual profit margin, secure financing on a sound footing, prepare for a business handover and minimise surprises during a tax audit. Conversely, maintaining two sets of accounts often ends up creating two problems: one with the tax authorities, the other with the business’s economic reality.

The financial pressure on SMEs can make certain practices tempting, especially when cash flow is tight. But in Switzerland, the organised concealment of income or assets is not merely a matter of tax planning. It can result in liability for the company and its directors. For an SME, the best defence remains consistent, well-documented accounts that have been checked thoroughly before the tax authorities, a bank or a judge asks for explanations.