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  • Service: Tax, Global Indirect Tax
  • Type: Business and industry issue
  • Date: 8/1/2012

New view from France on VAT with respect to waivers of debt 

New view from France

It is common for a parent company holding a claim over a subsidiary in a difficult financial situation to waive the debt owed. The effect of this on corporate income tax is well understood, since it results in a loss for the parent company (thereby decreasing the taxable revenues), while the revenues earned at the subsidiary’s level – and which are normally taxable –are offset by any deficits.

As far as French VAT is concerned, the situation has become less clear over the last few years. The position adopted by the French tax authorities during tax audits has cast doubts over the VAT treatment applicable to waivers of debt and, more generally, to subsidies.


A recent decision of the French Administrative Supreme Court, stating that intra-group waivers of debt could also have adverse VAT effects, has reinforced these doubts.


The Supreme Court found that waivers of debt granted by a parent company to one of its subsidiaries should be considered as subsidies supplementing the price of services rendered. As such, these subsidies should be subject to VAT. Indeed, the subsidies were deemed to have enabled the reassessed company to provide services at prices below cost price, the prices being dictated by a group contract concluded beforehand. Consequently, the debt waiver should not be construed as a budget-balancing grant, but as a taxable subsidy, one directly linked to the price of the services provided by the subsidiary.


The position of the Supreme Court impacts inter-company services to the extent that, when a subsidy is considered as supplementing the price paid by a third party, the VAT due on the subsidy is not recoverable by the beneficiary. This has two effects:

  • a VAT reassessment at the level of the company obtaining the waiver of debt or subsidy
  • the inability to deduct such VAT at company level.

However, the French taxpayer may be able to challenge the tax authorities following the principle laid down by the ECJ in the Office Des Produits Wallons case.


Therefore, the recent decision by the French Administrative Supreme Court, strengthening the position of the French tax authorities, should prompt companies granting intra-group waivers of debts to consider the VAT consequences on a case-by-case basis, in light of the conditions in which they are granted.

 

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