(French Administrative Supreme Court, 3° and 8° s-s-r., Dec. 4, 2013, no. 355694, Société Kepler Equities).

In the Société Télécoise decision of May 15, 2003, the French Administrative Supreme Court ruled that, pursuant to the principle of territoriality, when a French company conducts an industrial or commercial business in a branch abroad, variations in net assets resulting from events that are connected to this branch’s business are not to be taken into account to determine the profits subject to taxes in France.

However, the Court ruled that, when the branch has a commercial relationship with the head office and such relationship allows maintaining or developing the French company’s business in France, the French company is then authorized to deduct from its taxable earnings the losses resulting from the financial assistance provided to the branch within such relationship.

In the recent Société Kepler Equities decision of December 4, 2013, the French Administrative Supreme Court provided the terms for applying this case law.

In this case, a French investment company had waived a fraction of the advances granted to its Dutch and Swedish branches equaling the amount of losses incurred by the branches.  The company, which initially had not deducted these waivers of debt, then requested that they be deducted by offsetting against additional taxes assessed after a tax audit, which the tax authorities refused to do.

However, only a fraction of the disputed advances was aiming at developing a taxable business in France through commissions paid by the branches that received the financial assistance.

Due to a lack of evidence for assessing the relative size of the branch’s activity that allowed to generate income subject to taxation in France, the French Administrative Supreme Court confirmed the Paris Administrative Court of Appeal’s decision, ruling that the French company had not been able to prove that a portion of the waivers of debt  could be deducted from its taxable income in France.

Thus, in order to prove the deductibility of waivers of debt granted to a foreign branch, not only must a company prove that the waivers took place within the framework of a commercial relationship whose purpose and financial consideration is the development of business subject to taxes in France, the company must also determine the portion of the branch’s business that allowed to generate the French company’s income.