In a decision dated June 23, 1994, the Administrative Court of Appeal of Lyon (C.A.A. Lyon, 2nd Ch., n° 93-488, SARL Solim) set the rules to be followed concerning the consequences of inter-companies gifts.

A company granted advances without interests to its subsidiary and forgot to book in the accounts the contractual interests on a loan granted to a third company.

As far as advances without interests are concerned, the Court confirms the previous case law and indicates that the granting of advances without interests to a third party does not follow the arm's length principle even though the beneficiary is a subsidiary.

The fact that the beneficiary subsidiary is a "transparent" company, i.e. the results of which are directly taxed from the parent company, has no consequence on the solution of the dispute.

As far as the accounting failure of the payable interests is concerned, it is not contrary to the arm's length principle. The payable interests of each tax year must compulsorily be booked as a receivable in the balance-sheet, according to Article 38 of the French General Tax Code.

The failure to book such interests in the accounting result is not an accounting mistake, but a management decision which can be opposed to the company. As a consequence, the Administration has the right to add back the interests not booked in the accounts by the lender. If the latter has difficulties to recover its debt from the borrower, he only has the possibility to record a bad debt allowance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. For additional information contact Claire Acard on 33/(1)/55 61 10 10 or Lionel Benant on 33/78.63.72.35. 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.