In a ruling handed down on March 22, 2023, the French Conseil d'Etat ruled on the tax deductibility of damages paid by a partner to the other partners for his abusive retention in a société civile professionnelle (SCP).
Refusal of a notary to withdraw from an SCP
In this case, a notary who had been a member of a professional partnership until February 1, 1997, retired on September 16, 2003, but refused to withdraw from the partnership. In the ensuing litigation, the partners were ordered to pay him the share of the profits made by the SCP corresponding to his shares in the company. For his part, the notary was ordered to pay damages (630,000 euros) to the partners in compensation for the harm caused by his abusive retention in the SCP.
Non-deductible damages
He had deducted from his share of the company's profits the costs of lawyers, legal documents and proceedings, as well as damages paid to the partners. However, following an examination of his tax situation, the tax authorities ruled that these expenses could not be linked to the normal exercise of the notary's profession.
The case went to court. The administrative court initially rejected the notary's request for discharge of the taxes concerned. In a ruling dated March 31, 2020, the Administrative Court of Appeal reduced the tax bases.
Lastly, the Conseil d'Etat did not rule in favor of the partner wrongfully retained in the partnership. The Conseil de l'Etat ruled that, insofar as the aim was to retain shares in the SCP without carrying out any professional activity, it was not possible to deduct expenses incurred to retain an item of private property. In other words, the damages owed by the notary to the other partners as a result of his abusive retention in the partnership are not deductible from the income he earns from his share of the SCP's profits.
In a ruling handed down on March 22, 2023, the French Conseil d'Etat reiterated that expenses incurred to " acquire or maintain assets used in the taxpayer's business or profession " are deductible. Conversely, expenses incurred to " maintain or increase the taxpayer's private assets " cannot be deducted, even if " income may be derived from certain elements of these assets ".