(Montreuil Administrative Court, Mar. 17, 2014, no. 1209992, SAS Volvo Holding France)

In sales of vehicles, notably of heavy trucks or of fleets of vehicles to rental agencies, the manufacturer often accompanies these sales with a commitment to buy back the vehicles after several months or several years. The manufacturer then resells them as used vehicles.

When the expected resale of these vehicles shows a probable loss, in its accounts, the manufacturer creates a reserve, more commonly called the “buy-back” reserve, which the tax authorities and case law accept as being tax deductible.

However, in a decision on March 17, 2014, no. 1209992, SAS Volvo Holding France, the Montreuil Administrative Court held that such a reserve is not deductible if it does not take into account the earnings expected from other vehicles, although the buy-back agreements were concluded with different clients and on different terms.

The Administrative Court specifically based its position on the opinion of the Public Rapporteur, Mrs. Virginie Restino, regarding the concept of an “adequately homogeneous group of transactions”: this concept was emphasized in a decision by the French Administrative Supreme Court on June 28, 1971 (no. 77921, Société Générale), regarding a reserve for losses on home-purchase savings accounts and a comparison to be made between the costs to be incurred and expected income.

Adopting the Public Rapporteur's opinion, the Administrative Court ruled that, given the company's business, the agreements had to be taken as a whole to assess expected losses and earnings.

This reasoning was not all that evident because, as previously stated, the terms set in the vehicle sales and buy-back agreements were different and they involved different clients.

It is worth pointing out that offsetting between latent losses and earnings already exists for the deductibility of reserves for depreciation of investment property or shares of primarily real estate companies (Article 39-1-5° of the French Tax Code), but it is also expressly stated in a legislative provision because, generally speaking, following the rules of careful accounting, offsetting between latent earnings and losses is not provided for.

The remaining question is whether this position will be affirmed on appeal and, if it is, whether it will be likely to apply to similar situations (e.g., multi-year delivery or service agreements).