Reclassification of equity securities:administration delighted

A company operating in the milk supply market had acquired virtually all of a competitor’s shares between May 2007 and October 2009. These shares were then recorded in an equity securities account.

In April 2009, the company reclassified the securities to an “long-term securities held for investment” account; then, in October 2009, it liquidated the securities of its new subsidiary by canceling them. It subsequently recognized a capital loss on the disposal and determined that this loss was deductible from its taxable income.

Following a tax audit,administration this reclassification and determined that the capital loss incurred by the company was a long-term capital loss that could not be deducted from the company’s taxable income.

This reassessment was challenged all the way to the Administrative Court of Appeals.

The court will first note that the minutes of the company’s Board of Directors meeting indicated that the purchase of the securities was part of a merger authorized by the DGCCRF and that, therefore, the securities were acquired with the intent of holding them for the long term.

The Court therefore finds that the securities were equity securities at the time of their acquisition.

The company argued, however, that the reclassification of securities was justified because the acquired subsidiary had sold its stakes in several companies during 2009 and, as of the date of the reclassification, no longer had any industrial assets but only cash reserves amounting to several million euros. It also argued that the objective of eliminating a competitor had been achieved and that the accounting reclassification had been validated by an independent auditor.

The Court will, however, rule that the company continued to hold virtually all of the competitor’s capital until the competitor ceased to exist. It concludes that “it therefore continued to exercise influence over the issuing company through this control.” The circumstances mentioned above did not, therefore, alter the classification of the securities as equity securities.

The Court therefore upholds the tax assessment and the imposition of 40% penalties for willful noncompliance.

CAA Paris, June 19, 2026, No. 24PA01248 

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