The Conseil d'Etat clarifies the notion of commercial aid deductible from taxable profit

In a ruling handed down on July 26, the French Conseil d'Etat clarified the notion of deductible commercial aid, thus impacting companies' taxable profits. It states that the payment of aid motivated by the development of an activity that has not generated sales may be considered commercial in nature, provided that the company's development prospects appeared serious at the time the aid was granted, thus clarifying the relevant case law.

The facts

In this case, a company had granted its subsidiary, which specialized in the manufacture of composite materials, a license to use its technological know-how. The contract did not provide for any financial consideration for the parent company, but specified that any improvements made by the subsidiary would remain its exclusive property.

In 2014, the parent company granted its subsidiary, which was experiencing financial difficulties, a debt waiver for accounting purposes. This aid, considered to be of a commercial nature, was deducted from the subsidiary's income. The tax authorities disagreed. Taking the view that the debt waiver was of a financial nature, it ruled that it could not be deducted.

In the first instance, the lower court ruled in favor of the French tax authorities. They justified their decision on the grounds that the parent company was not being remunerated for transferring its know-how to its subsidiary, and that the business developed in this context had not generated any sales at the date the debt waiver was granted.

A commercial waiver

The Conseil d'Etat disagreed with the judges' analysis. It considers that, at the time the debt waiver was granted, the prospects for commercial development of the technology granted to the subsidiary appeared serious. In particular, the subsidiary had manufactured various parts for a business jet currently under development.

Even if the aid granted did not generate any sales, it may be of a commercial nature if " the development prospects of this activity do not appear, at that same date, to be purely contingent ", explains the Conseil d'Etat in its ruling of July 26, 2023. The Conseil adds that even if the waiver was partly motivated by financial considerations, it was predominantly of a commercial nature, given the financial difficulties encountered by the subsidiary.

As a result of this decision, the parent company was relieved of the additional corporate income tax assessment to which its subsidiary had been liable in respect of the 2014 financial year, as well as the corresponding penalties. The decision of the Administrative Court of Appeal and the judgment of the Administrative Court were annulled.