In a decision dated July 3, 1996, the Administrative Court of Appeal of Nantes ruled that the sums paid by a head accountant in performance of a guarantee agreement which he had entered into on behalf of a firm, in which he had both the capacity of employee and of director (owning 49.9 % of the company's share capital), were not deductible from his taxable income.
Sums paid by taxpayers, who have the double quality of employee and shareholder, in performance of a guarantee agreement in which they entered on behalf of a firm, are deductible from taxable income when:
a. the guarantee is in the interest of the firm (e.g. in order to obtain a loan) ;
b. the person is an executive of the firm ;
c. the amount guaranteed is not disproportional to the person's salary (i.e. a proportion of 1 to 3 seems to be accepted by the tax courts).
In the case at hand, the Court ruled that neither his position as head accountant nor as director gave the taxpayer the status of executive of the firm. Not being an executive, entering into a guarantee agreement on behalf of the firm did not fall within the scope of his normal duties. Therefore, such an act could not be analyzed as having been undertaken in order to protect the revenue he perceived from his salary, but in order to protect the capital he had invested in the firm.
Consequently, the loss incurred is to be deemed as a capital loss (i.e. not deductible) attributable to his capacity as shareholder, and not as an expense incurred for maintaining the income derived from his salaried employment (i.e. deductible).
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