Previous tax losses from statute-barred years can be audited by the tax authorities

The Conseil d'Etat recently intervened in a dispute concerning the tax authorities' right to audit unused tax loss carryforwards relating to years prescribed by the tax authorities.

The facts

In this case, a company manufacturing and trading lighters, writing instruments and accessories was subject to an accounting audit for its 2008-2011 financial years. In its conclusions, the tax authorities found that the prices at which the company sold its products to its Hong Kong-based subsidiary constituted a transfer of profits abroad. It therefore corrected the losses declared by the company in respect of these years, and called into question the losses recorded in respect of years prior to the first year not barred by the statute of limitations.

At first instance, the administrative court ruled that the administration was entitled to carry out these verifications. Challenging this decision, the company appealed, but the court disagreed. The judges ruled that tax loss carryforwards necessarily have an impact on the results used to calculate tax, insofar as losses from previous years have the effect of increasing the losses of years not barred by the statute of limitations. The company therefore appealed to the French Supreme Court.

The tax authorities can audit losses carried forward from statute-barred years

The Conseil d'Etat has been asked to rule on the following question: can the tax authorities audit unused tax loss carryforwards relating to statute-barred years?

According to case law, when auditing the accounts of a non-barred tax year, the tax authorities are entitled to check the deficits resulting from barred tax years that have been set off against a non-barred tax year, and to question the amount of these deficits if they have an impact on the result of the non-barred tax year concerned. In a ruling handed down on July 5, 2023, the Conseil d'Etat confirmed this analysis, ruling that the tax authorities may exercise their power of control and rectification over the existence and amount of deficit carryforwards arising from prior years, even if time-barred.

As a result, the company's appeal was dismissed and the tax authorities were deemed competent to audit the unused tax loss carryforwards relating to the years 2008 to 2011.

In this context, the Conseil d'Etat points out that the taxpayer retains the right to contest the reduction in the amount of the loss carried forward by the tax authorities, in accordance with the provisions ofArticle L 190 of the French Tax Procedures Code.