(Paris Administrative Court of Appeal, Dec. 12, 2013 no. 12PA01513, 5th ch., SNC Sté Consortium Européen Hôtelier)
Since the second 2012 Amending Finance Act, with the exception of financial debt write-offs granted to companies in financial difficulty, now only commercial debt write-offs are deductible subject to certain limits and provided that the write-offs occur in the ordinary course of business and are in the paying company’s own interest. In principle, the company benefiting from the debt write-off is liable to tax on the amount written off.
Such limitation of the deductibility of debt write-offs, however, has no impact on the tax treatment of so-called “financial recovery” clauses, pursuant to which debtors to whom debt write-offs were granted agree to reimburse all or part of their debt if their financial situation improves. Indeed, the amounts paid pursuant to such clauses remain deductible from the paying company’s taxable earnings and, conversely, the creditor receiving the amount pursuant to such financial recovery clause is taxable only up to the amount initially deducted (BOI-BIC-BASE-50-20 no. 280 and 290, Jan. 29, 2013).
Nevertheless, as illustrated by a recent decision of the Paris Administrative Court of Appeal (Paris Administrative Court of Appeal, Dec. 12, 2013, no. 12PA01513, SNC Sté Consortium Européen Hôtelier), the debt write-off, whether it is a straightforward debt write-off or if it is accompanied by a financial recovery clause, presumes not only the creditor’s unequivocal desire to erase the debt (proof of intent extending, if applicable, to the debt’s resurgence subject to certain conditions), but also the prior existence of a debt booked in the accounts (material proof). Failing this, the amount paid pursuant to the agreement constitutes a non-deductible gift or subsidy.
In this case, a company had received cash advances from its parent company between 1992 and 2001. Although the corresponding interest had not been booked in its accounts, the company argued that the interest corresponding to the written-off debt notably resulted from an oral agreement concluded with the parent company and from an affidavit by the parent company’s statutory auditor. Restating word-for-word the ratio decidendi of the French Administrative Supreme Court in its Etablissement Lebreton decision (French Administrative Supreme Court, Jun. 20, 2003, no. 232832, Sect.), the Court refused to place a burden on the tax authorities of providing negative proof (i.e., the non-existence of the underlying debt) and ruled that the evidence provided by the taxpayer did not establish the material existence of the debt that was initially written off.
Beyond providing the material proof and proof of intent, care must be taken to ensure that the financial recovery conditions are not artificially created. Otherwise, the arrangement could be disregarded on the grounds of the French GAAR (cf. CADF, Opinion no. 9/2013, case no. 2013-36, Nov. 22, 2013) as financial recovery clauses are not meant to be, in principle, tax planning tools.