Depreciation of a shareholder’s current account with a company (compte courant) subject to corporation tax in a transparent subsidiary: the Conseil d’Etat (France’s highest administrative Court) censures four errors of law by the Nancy Administrative Court of Appeal.
The facts:
A civil company that has opted to be subject to corporation tax and operates as a holding company holds participations in several transparent companies (SCI and SCEA), representing at least 50% of the shares.
Having made advances on the current account held with these companies, it is required to deduct provisions for doubtful debts from its taxable income.
In its decision handed down on 12 March 2025 (CE 9° et 10° ch., n°474824, société civile Saint-Louis), the Conseil d’Etat overturned the ruling of the Nancy Administrative Court of Appeal No. 21NC00529 of 6 April 2023 on the grounds of four errors of law and reversed its case law in points 4 and 7 of its decision.
The depreciation of a shareholder’s debt and the operating loss of the translucent debtor company are separable:
Point 4: the Council of State states that:
“Shareholders must take into account, at the end of their own financial years, as taxable profit or as a deductible expense, their share of the profits or losses of the civil company. This rule does not, in itself, prevent a shareholder in a civil real estate company from setting aside a provision, under the conditions provided for in Article 39(1)(5) of the Code, to take into account the risk of loss of an advance that he or she has granted to that company.
However, since a UFIC decision of 6 November 1985 (CE, 6 Nov. 1985 No. 47537: Lebon), it has been ruled out that partners (associés) in partnerships (société de personnes) may deduct a provision to cover a risk of loss resulting from the activity of the partnership.”
Similarly, the Conseil d’Etat refused to allow partners in partnerships to deduct provisions for depreciation of shares when this depreciation resulted from the company's losses (CE 24 novembre 1974, n°91410, société Constructions Générales et Fondations ; CE 3 juin 1994 n°123220 société auxiliaire d’investissement).
The principle being that such a provision would constitute a double deduction, taking into account the losses incurred by the company and the shareholder/partner.
Nevertheless, an industrial and commercial enterprise that holds an interest in a partnership may set aside a provision for impairment of that interest to the extent that the net book value of the company is overvalued in relation to the probable amount of its liquidation (CE 29 January 1992, No. 75083, 7° and 9° ss. Interconstruction).
In its decision handed down on 12 March 2025, the Conseil d’Etat now separates the deduction of a provision for doubtful debts recorded by the shareholder/partner from the operating loss resulting from the deficits generated by the debtor subsidiary company, which is deducted from the partner's taxable income.
In this respect, the ruling of the Court of Nancy was censured for error of law for the first time.
The doubtful nature of the debt must be assessed solely in relation to the situation of the debtor civil company, and not that of its shareholders/partners:
Point 7: the Conseil d’Etat states that:
“the obligation of the partners of a civil company to pay the debts provided for in Article 1857 of the Civil Code cited in point 6 applies, in any event, only to debts owed to third parties and not to the partners, the Court committed an error of law.’”
The first paragraph of Article 1857 of the Civil Code states:
“With regard to third parties, the partners [of a civil company] are jointly and severally liable for the company's debts in proportion to their share in the share capital on the date of repayment or on the date of cessation of payments.”
According to a ruling handed down by the Court of Cassation on 3 May 2012 (Cass. com. 3 May 2012, No. 11-14-844, F-P+B), the partners of a civil company cannot invoke the obligation to pay company debts established solely for the benefit of third parties by Article 1857 of the Civil Code. A civil company had received advances on a current account from a partner. Wishing to obtain repayment of these advances, the partner sued the company for payment and initiated unsuccessful proceedings under Article 1858 of the Civil Code. The partner then sued her co-partner for payment in proportion to her share in the share capital. The Court rejected the creditor partner's claims on the grounds that the obligation to pay company debts was established for the sole benefit of third parties.
The Conseil d’Etat endorsed this interpretation: the creditor partner is not a third party to the company. Consequently, this interpretation of the Civil Code invalidates the basis of the landmark decision of 27 November 1974, No. 9140, in which the Conseil d’Etat rejected the taxpayer's request on the grounds that, since the members of an SCI are liable for its debts to creditors, a claim against an SCI can only be considered doubtful if it is recognised as such by both the members of the company and the company itself.
Consequently, the Conseil d’Etat logically drew the conclusion that the Administrative Court of Appeal of Nancy had erred in law on 6 April 2023, ruling that the doubtful nature of the debt was not justified on the grounds that it had not been established that “the other partner was unable to meet the payment of these corporate debts.”
If the reference to the concept of a third party is key, could the basis on which the Conseil d’Etat relied (the interpretation of Article 1857 of the Civil Code by the Court of Cassation) be transposed to the partners of a general partnership?
Article L 221-1 of the Commercial Code provides that “partners in a general partnership (associés en nom collectif) are all merchants (commerçant) and are jointly and severally liable for the company's debts.”
The Public Rapporteur, Ms Céline Guibé, mentions in her conclusions that Article L 221-1 "does not distinguish between the status of the creditor, whether a third party or a partner – in the case of general partnerships – that a partner who is a creditor of the company for advances made in the common interest has no joint and several action against his co-partners for the repayment of his or her debt (civ. 17 June 1889: DP 1890, 5, 360)‘.
Consequently, the decision of principle adopted by the Conseil d’Etat in its decision of 12 March 2025 would not be “restricted” to civil companies, according to Ms Céline Guibé, Public Rapporteur. To date, to our knowledge, the Conseil d’Etat has not ruled on the transposition of its decision of 12 March 2025 to all partners holding a claim against a partnership, regardless of its form.
The provisioning of a current account advance does not constitute financial assistance within the meaning of the provisions of Article 39(13) of the CGI:
Point 9: The Conseil d’Etat states that:
“In ruling that the reinstatement of provisions recorded in respect of advances granted by the company Saint-Louis, their partner, to SCI Les Amis Sportifs and SCI du Fort Pélissier was justified on the grounds that these advances constituted financial aid falling within the scope of the provisions of Article 39(13) of the General Tax Code cited in point 8, whereas, given the nature and functioning of the shareholder current account, the sums credited to such an account have the essential characteristic, in the absence of any specific or statutory agreement governing that account, of being repayable at any time, the Court committed an error of law”
The first paragraph of Article 39(13) of the General Tax Code provides:
“Aid of any kind granted to another company, with the exception of commercial aid, is excluded from deductible expenses for the purposes of taxation.”
The Lyon Administrative Court applies the traditional rule that a provision set aside to cover a loss or expense is deductible under Article 39(1)(5) of the CGI only when the expense or loss it anticipates is itself likely to affect the tax base for a future financial year (in this sense, CE 12 June 2013 No. 351702 3° and 8° ss. BNP Paribas).
Until now, the Administrative Courts of Appeal have adopted different positions.
The Nancy Administrative Court of Appeal (CAA Nancy 18 March 2021 No. 19NCO2656 EURL Amadeus Immobilier et Environnement; CE (na) 8°ch. 06.12.2021 No. 452721) ruled that advances granted to subsidiaries were financial aid and were therefore not deductible from profits subject to corporation tax under the provisions of Article 39(13) of the CGI. Consequently, the provisions set aside to cover the risk of non-recovery of these receivables were themselves not deductible from profits as they were not intended to cover deductible expenses. However, the decision also emphasised that no event in progress at the end of the financial year justified the risk of non-recovery of the receivable at the end of the financial year.
Again, the Nancy Administrative Court of Appeal (CAA Nancy, 22 September 2022, No. 21NC00302, Société Himmler Participations) ruled that, in view of the circumstances of the case, the advances constituted financial assistance, justifying the non-deductibility of their depreciation.
Conversely, in favour of deductibility:
The Lyon Administrative Court of Appeal (CAA Lyon 31 March 2022 No. 20LYO 1253 – SARL NAMBUDO and CE (na) 9° ch. 20/02/2023 No. 464467): the depreciation of a debt does not constitute aid within the meaning of 39.13 of the CGI. According to the Court, this distinction between a provision and the granting of aid is not affected by the fact that the company intended to abandon the debt as soon as the provision was made.
The decision of the Conseil d’Etat of 12 March 2025 appears to confirm the approach taken by the Lyon Administrative Court of Appeal on 31 March 2022.
In its decision of 12 March 2025, the Conseil d’Etat ruled that the Nancy Administrative Court of Appeal had erred in law in considering that the advances granted constituted financial aid falling within the scope of the prohibition on deduction provided for in Article 39.13 of the General Tax Code, even though the essential characteristic of a current account advance is that it is repayable at any time.
The recognition of aid presupposes that the creditor company has effectively waived its right to claim payment of its debt.
Furthermore, Ms Céline Guibé, Public Rapporteur, specifies:
“When a partner maintains its debt on its assets until the liquidation of the company, and is then unable to recover it due to the latter's insufficient assets [...], it may record a loss.”
[…..] And while it may be noted that, in practice, it is possible for a company to circumvent the prohibition on deducting financial aid laid down in Article 39(13) of the CGI by setting up a provision, rather than waiving an advance, this difficulty is not specific to partnerships. In such a case, it seems to us that the only – narrow – avenue open to the tax authorities would be to demonstrate that the sum in question, although recorded as an advance, was in fact a gift made by the partner.
While it is clear that “luxury” expenses (hunting, fishing, holiday homes, yachts, private cars) referred to in Article 39.4 of the CGI are excluded from deductible expenses, this article alone does not allow the provisions on the partner's debt to be called into question.
Point 12: The Conseil d’Etat states that:
"In ruling that the reintegration of the provisions recorded by the Saint-Louis civil company was justified on the grounds, on the one hand, of the depreciation of its shareholding in SCEA 2J and, on the other hand, of the doubtful nature of the receivables it held on that company, on the sole ground that the constitution of the latter would have made it possible to set up, for the personal use of Mr B... and Mrs A..., a recreational park to be regarded as a pleasure or recreational residence within the meaning of the provisions of Article 39(4) of the General Tax Code cited in point 9, whereas these provisions, while preventing a company that owns such a residence from deducting the related expenses, do not in themselves allow the provisions set up by the partner of that company to be called into question, the court committed an error of law.”
As indicated by the Public Rapporteur, the tax authorities should have first ruled out the artificial interposition of the SCEA on the grounds of abuse of law.
Consequently, the Administrative Court of Nancy is censured one last time for error of law.
Conclusions:
In reversing its previous case law, the decision handed down on 12 March 2025 by the Conseil d’Etat states that:
the depreciation of a shareholder's receivable subject to corporation tax on a transparent civil company that is a debtor and the operating loss of the latter are separable;
that the doubtful nature of this debt must be assessed solely in relation to the situation of the debtor civil company, and not that of the co-shareholders, as the creditor shareholder is not a third party to the company.
In light of the conclusions of the Public Rapporteur in the Council of State's decision of 12 March 2025, it appears that:
a provision for impairment of a debt does not presume that it will be waived: the recognition of aid presupposes that the creditor company has voluntarily waived its right to claim payment of its debt, and this is not the case when the partner maintains the debt on its balance sheet until the liquidation of the company and cannot obtain recovery due to the latter's insufficient assets.
The only way for the authorities to refuse the deductibility of a provision for impairment of an advance, the deduction of which would be prohibited under Article 39.13 of the French General Tax Code, would be to demonstrate that the advance recorded in the accounts was in fact a gift.