Encouraging an employee to continue his or her efforts to turn a company around justifies the undervaluation of the securities

In 2015, a company transferred shares in a subsidiary to the holding company of its CEO at a price below the market value of the shares, in accordance with a sales agreement signed in 2011.

administration , believing that the sale price was undervalued, then adjusted:

• the company believed that it had suffered a financial loss without receiving any compensation in return;

• the holding company believed that it had received a distribution constituting a hidden benefit.

It had also imposed penalties for willful misconduct.

The tax assessment was challenged all the way up to the Administrative Court of Appeals.

The report notes that the CEO was hired in 2005 following significant difficulties at the subsidiary. He had "extensive experience as a manager of commercial companies in the construction sector." After implementing a reorganization plan, he helped the company return to profitability in 2011.

The subsidiary had also benefited from debt forgiveness between 2007 and 2009, subject to a better-fortune clause, granted by the parent company. The subsidiary then began repaying these forgiven amounts in 2011.

The Court thus notes that the subsidiary’s financial and business situation in 2011, at the time the preliminary agreement to sell the shares was entered into, “remained fragile and did not allow for a reasonable expectation, by 2014, that the value of its shares would increase to the extent that was ultimately observed.”

Thus, the purpose of entering into the preliminary sales agreement was to encourage the CEO to continue his efforts to turn the subsidiary around by giving him a stake in the outcome. The sale was therefore not made at an undervalued price, contrary toadministration assessment,administration had further concluded that the taxpayers intended to evade tax.

The Court thus upholds the Administrative Court’s ruling, which had previously overturned the assessment.

CAA Lyon, August 13, 2025, No. 23LY02490 and CAA Lyon, August 13, 2025, No. 24LY02635

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