(French Administrative Supreme Court, Jul. 6, 2015, no. 368218)

An officer of a French société anonyme (public limited company) deducted from his own salary income, as actual business expenses, the amounts he had paid to perform his obligation in his capacity of guarantor vis-à-vis the subsidiary of the company of which he is an officer.  However, the tax authorities challenged this deduction pursuant to the combined provisions of Articles 13 and 83-3° of the FTC.

It must be pointed out that among the expenses which are tax deductible from salary income, the French tax authorities provide for the possibility of deducting amounts paid to perform the obligations under an undertaking, provided that a certain number of conditions are satisfied and the deduction is capped at 3 times the salary allocated to an officer or 3 times the salary he could have expected when he undertook such obligations (BOI-RSA-BASE-30-50-30-40, no. 150 et seq.).

In this case, the French Administrative Supreme Court restated the list of the deduction conditions it had specified in a case on August 4, 2006 (French Administrative Supreme Court, 9th and 10th subsect., no. 268127), regarding a situation in which the officer was guarantor for a subsidiary of the parent company that paid him his remuneration.

Hence, if an undertaking exists for a subsidiary, the following analysis grid is applicable:

  • the officer must have provided the undertaking in his capacity of officer,  
  • the officer must have provided the guarantee in the interests of the company he manages,  
  • the guarantee obligations must not be disproportionate to the remuneration the officer receives,  
  • the officer must be able to demonstrate that he provided a personal undertaking so as to protect his own remuneration because:  
  • the company he manages was not able to provide a guarantee itself, and  
  • the company's business could have been jeopardized by a possible default by the principal debtor.

In this decision, the plaintiff officer did not prove that the company he managed had experienced any temporary problems or had received any demands from lender institutions making it impossible for the company itself to provide a guarantee for its subsidiary.  Moreover, specifically because of the parent company's situation and the relative share of the subsidiaries' earnings in the parent company's earnings, he did not established that, had the subsidiaries' problems worsened, this situation would have jeopardized the parent company's business and, consequently, the officer's remuneration.

As a result, the French Administrative Supreme Court logically rejected the deduction of the amounts paid by the manager as actual expenses.