In a recent decision, the Administrative Court of Appeal of Paris (C.A.A. June 29, 1995) considered that the interest of the group and the policy conducted by the parent company are not enough to give a normal feature to a minority investment performed by a subsidiary A of the group into a sister-company B in a tax loss position, as this operation does not present any interest for the company A but the aim of which is company A bears a part of the financial expenses generated by the losses of company B.
Thus, neither the reserves made up owing to the irrecoverable nature of advances granted by A to B immediately after the investment, nor the loss resulting from the sale, the year after, of the receivable held on B at 10% of its nominal value, may give rise to a deduction of the results of A, insofar as the latter operations are the consequences of an act not meeting the arm's length principle.
Finally, the short term capital loss appearing shortly after, at the time of the sale of the shares of B, is neither deductible, insofar as it results from the abnormal conditions in which occurred this withdrawal operation, which was part of the new strategy of the group.
This case law confirms that the judge does not accept that management decisions be motivated by the sole interest of the group and not by the own interest of the company granting the advantage.
Advances granted with a financial interest
A company engaged in the trade of fine wines took over two companies the respective activities of which are the precision mechanics and the sheet metal manufacture. Following a cessation of activity of the two latter companies, the parent company has booked a reserve for depreciation of the debt it holds owing to the advances previously granted.
, the Administrative Court of Appeal of Nancy has considered that the Tax Authorities, to challenge the deductibility of the reserve, may not put forward the lack of opportunity of the take-over realised, without regularly interfering in the management of the companies (C.A.A. Nancy, July 6, 1995).
Moreover, the company proves that the advances have been granted in its own financial interest and reflect a normal management, arguing that it tried to avoid a bankruptcy of the two companies, which might have prejudiced its own fame and possibly be obliged to ask for the payment of the debts by a third party.
Then, the reserves made up owing to the irrecoverable nature of the debts are deductible from the taxable results.
This Court Case also confirms that the principle of non-interfering in the management of companies is also contrary to the fact that the Tax Authorities challenge the deduction of the subsidy granted by a company to one of its subsidiaries in difficulty, arguing that it could have used other means to reach the same goal.
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 33/184.108.40.206 or Joel Fischer on 33/220.127.116.11 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.
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