Is the amount paid to compensate an employee for a tax reassessment resulting from an arrangement set up by the employer subject to tax?

A taxpayer had been subject to a tax assessment in connection with a management package. On the grounds of abuse of rights,administration reclassified dividends as salary. The taxpayer subsequently entered into a memorandum of understanding with the company that employed him—and which had set up the arrangement—so that the company would compensate him for the tax assessment.

Following a tax audit,administration that the compensation received in this context should be classified as wages and notified the taxpayer of a tax assessment to that effect.

On the contrary, he believed that this amount was not taxable because it was compensation for his decision not to pursue legal action to hold his employer liable in connection with the illegal financial arrangement that had been set up.

The Administrative Court of Appeals, to which the dispute was referred, first noted thatadministration imposed 40% penalties in connection with the initial assessment“on the grounds that he had deliberately participated in an arrangement set up for the sole purpose of evading taxes, notwithstanding the fact that he was neither the initiator nor the principal beneficiary.”

It concludes that the taxpayer could not claim to lack“specific knowledge of the legal techniques used in this tax avoidance scheme, nor could he claim to be unable to obtain such information, given that he was neither a director nor a manager of the companies involved in the scheme.”

Finally, she notes that the amount paid was not“consideration for waiving legal action” but was intended to compensate the employee for the loss of compensation resulting from receiving compensation in the form of salary rather than dividends.

The Court therefore upholds the tax assessment.

She also believes that, under the tax treaty between France and the United Kingdom, the amount paid should be considered as having been received in connection with employment.

CAA Paris, June 18, 2026, No. 24PA04974

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