According to a general principle resulting from administrative comments and case law, where a company realises a transaction, this transaction must correspond to a normal management decision. One illustration of this concept is the situation where a company A granted advances to its manager and a company B belonging to the same group and then cancelled the interest due on these advances. The company A argued that this procedure was acceptable since the interest cancellation was compensated by the guarantee commitments given by the manager and the company B to the company A. The French Tax Authorities however considered this as an abnormal management decision.
The Administrative Court of Appeal of Lyon stated on October 25, 1995, that the Tax Authorities are deemed to prove that a debt cancellation is an abnormal management decision, where the company that cancelled the debt has not justified that it benefited from an appropriate compensation for this cancellation. In the present case, such a proof was not produced by the French Tax Authorities since the company A had justified that it received an appropriate compensation for the interest cancellation (guarantee commitments given to it) and since the mutual advantages constituted by the interest cancellation and this compensation were not out of proportion.
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