Mr. Gilbert Barbier, a member of the French Parliament, asked the French authorities whether or not a French company, which attributes receivables to a foreign branch in order to carry out the commercialization of French goods abroad, is entitled to claim a tax deduction for the said receivables, as the continuity of French outlets is concerned by the operation. Mr. Barbier insisted on the necessity of clarifying the French tax rules governing the determination of the taxable income of companies that operate both in France and abroad.

In a Ministerial Reply dated November 6, 1995, the French authorities stated that, by application of article 209 of the French tax code, only the profits derived from enterprises operating in France are subject to corporate income tax in France. Therefore, the tax deduction is admitted only for the losses and reserves that are connected to the activity carried out in France. The principle of territoriality suffers exceptions: the foreign operations start-up provisions and the discharge of debt granted by a French company to a foreign subsidiary, when the discharge of debt is made in the interest of the parent company's activity in France. However, such exceptions cannot apply where the foreign entity is a branch which does not have a different legal status from the French entity. In such a case, no tax deduction is available, as the impossibility of having a receivable or a liability inside the same legal entity does not allow for booking a loss or a reserve.

Ministerial replies, among other sources, express the tax administration's doctrine. As regards case law, an isolated ruling of the French Supreme Administrative Court dated March 2, 1988, admitted the principle of the booking of a reserve by a French company further to a transfer of funds to its foreign branch, where the objective of such transfer was, for the French entity, to develop its own activities in France. To date, this decision has never been confirmed nor invalidated.

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