Tax exemption for an incineration plant: distinction between public service and competitive economic activities

Federal Supreme Court, 26.03.2026, 9C_205/2025

Facts

A.________ SA (the appellant) is a limited company that operates a waste incineration plant in Valais. Its capital is held entirely by municipalities in the cantons of Valais and Vaud. Its articles of association prohibit the distribution of dividends and stipulate that assets must be allocated to public service purposes in the event of dissolution. 

Historically, the company benefited from a full tax exemption, as its waste disposal activity was recognized as a public service task.

However, over the years, it has diversified its activities by venturing into the production and sale of energy (via a district heating network, electricity, and biogas), compost, and wood chips. These commercial activities have become a substantial source of revenue, accounting for nearly half of its turnover during the years in dispute (2015-2018). The Valais Cantonal Tax Service reviewed the situation and decided to end the full exemption. It subjected the company to partial taxation, targeting only the profits and capital linked to its economic activities.

Furthermore, during the appeal proceedings, the tax authority carried out a reformatio in peius by reintegrating into taxable profit significant amounts that the company had recorded as "provisions for future work" and "renewal funds."

The Cantonal Court of Valais upheld this dual approach: partial taxation was justified by the commercial nature of the energy activities, and the reintegration of the provisions was correct because they did not correspond to existing obligations but rather to reserves for future investments. The company then appealed to the Federal Supreme Court.

Law

1. Tax exemption for public service purposes (Art. 56 let. g DBRA)

Case law, interpreting this provision restrictively, establishes several cumulative conditions for granting an exemption:

• Three minimum conditions:
  1. Exclusivity: The activity must be carried out exclusively for the benefit of the common good.
  2. Irrevocability: Funds must be definitively allocated to this purpose.
  3. Actual activity: The company must act in accordance with its articles of association.

• Nature of the purpose: The company must pursue a public service purpose, meaning a task closely linked to the responsibilities of the State (e.g., waste disposal).

Absence of a primary profit motive: Exemption is excluded if the company pursues profit-making goals that are not purely secondary.

• An activity is considered profit-making if it is conducted in a competitive environment and aims to generate a profit.

Principle of competitive neutrality: Exempting an entity that competes with tax-paying private companies would violate this fundamental principle.

• A partial exemption is possible, but only if the economic activities do not exceed a certain threshold and a clear accounting separation is maintained.

2. Tax-deductible provisions (art. 63 DBRA)

• Tax definition: Deductible provisions must cover obligations existing at the balance sheet date or risks of imminent losses during the financial year.

Distinction from reserves: Funds set aside to finance future investments or asset renewals are not deductible provisions.

• These are hidden reserves, which are part of taxable profit.

Case ofart. 32a para. 3 EPA : The Environmental Protection Act requires operators of waste disposal facilities to establish "provisions."

• However, case law and legal doctrine agree that these "provisions" within the meaning of the EPA are actually reserves intended to finance future investments, rather than provisions under tax law.

Application to the specific case

The Federal Supreme Court upheld the lower court's analysis on both points.

1. Regarding the refusal of total exemption

• The Federal Supreme Court acknowledges that the company meets the three minimum conditions (exclusivity, irrevocability, actual activity) and that its incineration activity is indeed a public service.

However, it notes that the energy production and sales activities are purely entrepreneurial in nature.

The fact that the Environmental Protection Act (EPA) mandates waste recovery does not transform this commercial activity into a public service.

• Recovery remains an economic operation conducted in a competitive market.

• The "polluter-pays" argument is dismissed, as this principle is intended to fund waste disposal, not ancillary activities such as operating a heating network.

Above all, the scale of these commercial activities is too significant.

• Generating nearly half of the turnover, they cannot be classified as "secondary."

Granting a full exemption under these conditions would violate the principle of competitive neutrality.

• The refusal of a full exemption and the shift to partial taxation are therefore deemed compliant with federal law.

2. Regarding the reinstatement of provisions

• The Federal Supreme Court confirms that the amounts recorded by the appellant for "future works" and "renewal funds" are not tax-deductible provisions.

Their purpose was to fund future investments, not to cover existing obligations or risks at the close of the financial years.

• They are therefore taxable reserves.

Invoking Art. 32a para. 3 of the EPA does not alter this tax classification.

• This legal provision mandates the creation of reserves but does not create an exception to tax law allowing them to be deducted from profit.

• The reinstatement of these amounts into taxable profit is therefore correct.

Outcome

The Federal Supreme Court dismisses the appeal in its entirety. The partial taxation of the company for its commercial activities and the reinstatement of reserves for future investments into its taxable profit are definitively confirmed.

Court costs, set at CHF 16,000, are to be borne by the appellant.

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