After acquiring 7705 of the 10,000 shares constituting the capital of a competing company in a bankruptcy procedure for a nominal unit price and in return by committing itself to wipe off the liabilities, a company stood surety for the payment of the debts for which this subsidiary had obtained from the Administrative Court a three years moratorium. Later on, as the situation of the subsidiary was still deteriorating contrary to the forecasts of the adjustment plan, the parent company booked a provision for bad debt up to the debts of its subsidiary for which it considered as probable the challenge of its guarantee.

As the Tax Authorities do not state that the subsidiary's shares have not been purchased at their fair price, the commitment taken by the company to pay its debts cannot be considered as having constituted an additional purchase price of the shares. Afterwards, the provision booked in order to cover this commitment is justified insofar as, at the closing of the tax year, the loss of the debt held by the company in relation to this commitment appears probable (CE, March 20, 1996, no.96238, 9e and 8e s.-s. Budget Ministry, c/SA Maty; RJF 5/96, no.564).

By referring to the fair price, the French High Court applies the same argument as the one applied for a decree dated October 23, 1991 concerning a forgiveness of debt granted to a company at the time of its take-over. As far as the High Court is concerned, such a forgiveness constitutes a charge which is immediately deductible from the taxable income when it deals with the business interest of the creditor company and that the take-over was paid at the fair price.

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The members of ARCHIBALD ANDERSEN Association d'Avocats (S.G.Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar and the Lyon Bar.