• Service: Tax, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 3/26/2013

France - Tax credits not applicable for determining profit-sharing reserve 

March 26: The French Administrative Supreme Court (Conseil d’Etat) in a March 2013 decision “cancelled” administrative guidance and held that the research tax credit—and, more generally, all tax credits—are not to be used in determining the amount of corporate income tax that in turn would apply for purposes of calculating a company’s employee profit-sharing reserve.

The case is: Société Etudes et Productions Schlumberger, No 347633 (20 March 2013)


The French profit-sharing reserve is calculated by means of the following formula:

SPR = ½ x (P –5C/100) x S/VA


SPR = special profit-sharing reserve

P = net profit after tax (taxable profit minus tax)

C = capital and reserves of the company

S = salaries paid to employees

VA = added value

Therefore, under this formula, the employee profit-sharing reserve is calculated on the basis of the net profits—i.e., taxable profits net of the corresponding corporate income tax.

The French tax authorities issued administrative guidance (no. 4-N-1121, no. 43, (30 August 1997); Ruling of 13 April 2010, RES no. 2010/23) providing that tax credits—and, more specifically, the research tax credit—are to be applied to reduce the amount of the “corresponding tax” and thus effectively increase the amount of the employee profit-sharing reserve.

The position of the tax authorities in the 2010 guidance also went as far as to consider that in the event of a refund of the research tax credit, it would “generate a negative tax” resulting in an increase in the amount of profits to be considered in calculating the special profit-sharing reserve for employees.

For businesses that followed and applied the French tax authorities’ position, the 2010 guidance affected their profit-sharing calculations and, for some businesses, resulted in several hundred thousands of additional euros for the profit-sharing reserve.

Court’s decision

Despite the 2010 guidance, certain businesses resisted the position of the tax authorities, believing that this position was ill-founded or even disputable.

In the case before Conseil d’Etat, the company initiated legal proceedings claiming that the administrative guidance and ruling constituted an ultra vires action on the part of the tax authorities.

In its 20 March 2013 decision, the Conseil d’Etat effectively overturned the administrative guidance on the grounds that it added to the law and held that "in the event the business is eligible for tax credits deductible from the amount of this tax, it is not necessary [...] to take account of the amount of those credits" for the purpose of calculating the employee profit-sharing reserve.

The Conseil d’Etat thus rejected the tax authorities’ position, and specified that its decision applies to all tax credits—not just the research tax credit.

Consequences of the decision

This decision of the Conseil d’Etat has immediate effect—and applies in particular to a taxpayer’s FY 2012 (either closed or in the process of being closed) and to all subsequent fiscal years.

In the future, businesses would not include their tax credits in the calculation of the employee profit-sharing reserve.

In addition to the research tax credit, the decision concerns all tax credits and in particular the competitive tax credit (crédit d’impôt pour la compétivité et l’emploi – CICE), which the tax authorities had recently indicated would, like the research tax credit, be included in the calculation of the employee profit-sharing reserve.

KPMG observation

As has been observed by tax professionals with FIDAL,* the heretofore questionable position of the tax authorities has now been rejected and “overturned” by the French Administrative Supreme Court.

Thus, going forward, businesses will not have to take into account the amounts of tax credits, and particularly the research tax credit and the new competitive tax credit, in calculating their employee profit-sharing reserve.

This decision, however, may give rise to some uncertainty for businesses that followed and applied the tax authorities’ position—e.g., uncertainty as to how to treat sums paid to their employees in the past on a profit-sharing basis or how are they to proceed with respect to FY 2012 (in the process of being closed)?

Those businesses that did not follow the tax authorities’ position may feel more confident and reassured by the decision, and they will be able to add back any contingency provisions they may have set aside from an accounting aspect.

For more information, contact a tax professional at FIDAL Direction Internationale* in Paris:

Gilles Galinier-Warrain, French Tax Center, KPMG LLP, New York

+1 212-954-8605

Olivier Ferrari, Tax Partner

+33 (0)1 55 68 14 76

Patrick Seroin, Tax Partner

+33 (0)1 55 68 15 93

*FIDAL Direction Internationale is a French law firm that is independent from KPMG and its member firms.

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