In these two cases, SA Orange (formerly France Télécom SA) and SAS Dalkia were the parent companies of a tax consolidated group and held all the shares of their respective subsidiaries, Cogedom and Sopardel.
During the fiscal years closed in 2002 and 2003, SA Orange booked provisions for depreciation of shares in Cogecom. These provisions, booked in accounts, were not deducted from the company’s taxable profit. Similarly, on December 31, 2002, SAS Dalkia booked a provision for depreciation of its subsidiary’s shares, which was not deducted from its taxable profit for the fiscal year closed in 2002.
In 2003, SA Orange, and in 2005, SAS Dalkia decided the dissolution without liquidation of their subsidiaries. This transaction resulted, firstly, in the subsidiaries’ exiting from the tax consolidated group and the record of a merger loss tax deducted, and, secondly, the reversal of the provisions for depreciation of shares, which were tax deducted from the parent companies’ tax results and, therefore, not taxed because not initially deducted for tax purposes.
As a result of tax audits, in both cases, the tax authorities concluded that the relevant provision should have been tax deducted from the companies’ own taxable profits since the conditions required for this purpose were met and this, although it would have been been neutralized in the tax consolidated group for the determination of the tax consolidated result. Hence, the reversal of the provision should have been taxed at the individual company level and not neutralized at the group level, due to the exit of the subsidiaries by operation of the dissolution without liquidation.
In line with the Foncière du Rond-Point decision of the French Administrative Supreme Court (French Administrative Supreme Court, Full Tax Court, Dec. 23, 2013, No. 346018), the Versailles Administrative Court of Appeal ruled that when a provision has been booked in a fiscal year’s accounts, and unless the rules of tax law forbid it, notably the specific provisions of Article 39-1 5° of the French Tax Code ("FTC") limiting the tax deductibility of certain provisions, as a principle, the taxable result of that fiscal year must be reduced by the amount of this provision which the reversal, occurring in one or more subsequent fiscal years, results however in an increase in the net assets of the closing balance(s) sheet(s) of the corresponding fiscal year(s). The French Administrative Supreme Court also stated that the principle of intangibility of a non-time-barred first fiscal year’s opening balance sheet, as provided in Article 38-4 bis of the FTC, applies provided that the corrected omission was, for the tax payer, not deliberate.
However, in the two cases at hand, the Versailles Administrative Court ruled that the fact that the disputed provisions are not tax deductible does not result from a mere unintentional omission but were deliberate ones which, therefore, does not allow the companies to invoke to their benefit a symmetric adjustment of the balance sheets:
- in the Dalkia case, the company did not challenge the fact that the tax deductibility conditions were satisfied and, above all, the Administrative Court of Appeal pointed out that, “the path chosen by the company allowed it to avoid, when the subsidiary’s exiting from the tax integration would have been decided, the effects related to the de-neutralization of the provision reversal";
- in the Orange case, the Administrative Court of Appeal pointed out that it “is at the very least paradoxical that the first company [parent company] did not deduct a provision for depreciation of shares for tax purposes, finding its purpose in the deterioration of the situations of the second company’s main subsidiaries [the subsidiary the shares of which were depreciated in said provision], although the second company tax deducted provisions based on the depreciation of such subsidiaries.”. The Administrative Court of Appeal also pointed out that the path chosen by the company allowed it to avoid the effects related to the de-neutralization of the provision reversal resulting from the subsidiary’s exiting from the tax consolidated group. Conversely, SA Orange argued that the tax deductibility conditions were not satisfied since the DCF method used to determine the amount of the provision for the depreciation of shares did not allow to determine said amount of the provision accurately enough. However, it appeared the subsidiary was valued, not on the basis of the DCF method, but on the basis of its net equity adjusted with unrealized capital gains.
The Versailles Administrative Court of Appeal thus considered that the deliberate nature of the omission prevents the application of the principle of intangibility of the non-time-barred first fiscal year’s opening balance sheet, in contradiction with the opinion of the Public Rapporteur, Bruno Coudert, who, in support of his arguments, restated the commentaries of E. Crepey in his opinion in the Foncière du Rond-Point case: “Intangibility is (…), in our opinion, an objective and absolute rule required in all circumstances and imposed on all parties to the dispute. That which, in our opinion, was already true in the case-law regime on intangibility is all the more true in the legislative scheme, which sets a principle and determines precisely the cases in which it departs from the legislative scheme. For example, this includes errors or omissions occurring more than seven years before the beginning of the first non-time-barred fiscal year.”
Therefore, it follows from these two decisions that the rule of intangibility of the opening balance sheet of the first non-time-barred fiscal year, as stated in Article 38-4 bis of the FTC is inapplicable in the case of a deliberate error made by the taxpayer. Yet, although Article 38-4 bis of the FTC does indeed cover exceptions to the rule of intangibility, none of these exceptions provides for the case of a deliberate error. As for the preparatory work on which the Administrative Court of Appeal relies on to make its decision, one passage is certainly related to the consequences of errors or omissions made by the taxpayer depending on whether they were committed or made in good or bad faith. Yet, this passage is related only to the right to be forgotten, the purpose of which is to allow the taxpayer to fully benefit from the statute of limitations when his errors were made more than seven years before the beginning of the first non-time-barred fiscal year. Consequently, neither the wording of Article 38-4 bis of the FTC, nor the preparatory work may be asserted in support of the principle laid down by the Versailles Administrative Court of Appeal. Therefore, the Court of Appeal has apparently created a purely judicial exception to the law.
Lastly, it is worth considering whether a deliberate error could really have been proven in this case because, until the Foncière du Rond-Point decision, companies and legal experts considered that there was a certain freedom in the company's provisioning policy. Since theFoncière du Rond-Point decision, there is no longer doubt that this belief was erroneous. But, it is indisputable that before the Foncière du Rond-Point decision, at the very minimum, there was some uncertainty about the meaning of case laws. The Paris Administrative Court of Appeal acknowledged in its Foncière du Rond-Point decision, handed down after remand (Paris Administrative Court of Appeal, 9th Ch., Oct. 15, 2015, No. 13PA04863, SAS Foncière du Rond-Point), "that, before decision no. 346018 of the French Administrative Supreme Court on December 23, 2013, some uncertainty remained as to the obligation to modify the company's taxable result due to the booking of a provision in the fiscal year’s accounts.” Yet, a taxpayer cannot be reproached for having made a deliberate choice to the least costly way since, taken into consideration both case law and practices when he booked the item, he did not believe he was violating the then-current standards.