The contributions realised in the scope of mergers or comparable operations may be carried out under certain conditions, at the net book value. But article no.223 R of the French General Tax Code makes it compulsory to realise at the market value (as it is normally superior to the net book value) real estate transfers, in the broad sense of the term, between tax consolidated companies, for fear to be obliged to acknowledge a subsidy.

However the Tax Authorities agree, depending on the de facto circumstances proper to each matter and in view of a precise file, that the difference between the actual value of the goods contributed and their net book value should not be considered as an indirect subsidy.

Two situations may be distinguished:

1) PARTIAL BUSINESS TRANSFERS: when a company member of a group realises a partial business transfer to another company member of the group, both companies remain in the group after the operation. In this situation, the contribution is analysed as a sale within the group and articles 223 B and 223 R of the French General Tax Code apply. The sale at the book value of the items of the fixed assets is really a subsidy if the actual value of those goods is different. Thus in this case it is advisable to ask the Tax Authorities for a dispensation. This dispensation is conditioned by the respect of the commitments provided by articles 210 A and 210 B of the French General Tax Code.

Should the favourable regime application be retroactively challenged owing to the lack of respect of the commitments provided by articles 210 A and 210 B of the French General Tax Code, the capital gains realised at the time of the contribution will be determined from the real market value of the fixed assets at the date of this contribution.

For the company benefiting from this contribution, the indirect subsidy represented by the decrease of the price should then be related to its income, but would be deducted from the whole income, according to the provisions of article 223 B of the same code. This company would then be able to register the goods in its balance-sheet for their real value without having the revaluation profit taxed.

Finally, the outgoing of the goods or one or the other of the involved companies from the group would be likely to lead to, in the conditions provided by the texts in force, the consolidation of the subsidies thus deducted from the whole income.

2) MERGERS OR SPLITS-OF: the absorbed or split-of company disappears following the operation. The whole income of the tax year of the merger thus does only include the income of the absorbing company.

Article 223 B of the French General Tax Code is not applicable insofar as the incomes of the absorbed company are not included in the whole income. The neutralisation of the subsidy equal to the difference between the real value of the goods and their book value must not be applied.

Indeed, the contribution of goods at the net book value may constitute an indirect subsidy in the meaning of article 223 R of the French General Tax Code if two conditions are fulfilled:

- the book value is not equal to the real value of the goods;

- the incomes of the two companies realised the tax year during which the event occurred are included in the tax base of the group.

Therefore, in this hypothesis, no inter-group subsidy can be used in the meaning of articles 223 B and 223 R of the French General Tax Code, since there is only one company remaining (answer of the Tax Committee of the administrative organisation mission: session of February 20, 1996).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be brought about your specific circumstances.

For additional information contact Claire Acard on 33/(1)/55 61 10 10, Lionel Benant on 33/, Joel Fischer on 33/, or Laurent Borey on 33/(1).55 61 10 10 or enter text search: "ARCHIBALD ANDERSEN Profile".

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.