Forgiveness of debt to a foreign subsidiary

"The Tax Authorities do not prove that the grant of advances by a French company to an American subsidiary, first in order to promote its start up, then in order to solve the difficulties met by its sub-subsidiary, does not meet the arm's length principle insofar as the aim of these operations is the following:
-	the creation of a commercial trend, of which operation by these companies is meant to develop the own turnover of the company, especially by way of sale of the rights;

-	the prevention of the company from the risk resulting, for the company, either from the loss of its subsidiary as well as its sub-subsidiary, or a possible liability action of bankruptcy, the amount of which would have been, at the date of booking of the provisions, at least equal to the sums advanced.
As a consequence, the provisions booked owing to the risk of non collection of the advances granted may be deducted from the taxable income".

A first decree of the Administrative Court of Appeal of Paris on this subject refused the deduction of the litigious sums on the basis of some decrees of the Conseil d'Etat according to which repeated advances to a foreign company could not be deducted from the taxable income due to the territoriality rules of the corporate income tax (C.A.A. Paris, July 10, 1990, nø 891).

However, the High Court (e.g. Conseil d'Etat) clearly abandoned this case law in a decree dated February 11, 1994, which invalidated the decree of the Court of Appeal of Paris and precised that the deduction of the forgivenessess of debt of a financial nature had to be assessed depending only on the normal or abnormal nature of the operation without any reference to the territoriality principle (CE, February 11, 1994, nø 119726).

It should be noted that in the present case the Court considers that the realisation of advances was also justified by the commercial interest of the company, whereas the Court had refused to acknowledge the existence of such an interest in its previous decree (C.A.A. Paris, February 2, 1995, nø 89.891, 3ø ch., SA Les Editions J.C. LattŠs).

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/ 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.
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