Is the forgiveness of a debt that is not tax-deductible subject to taxation?

A company was charged interest on loans by its shareholders during the 2012–2015 fiscal years.

These interest expenses had not been fully deducted for tax purposes because the company had applied the cap set forth in Article 39, paragraph 1, subparagraph 3. Consequently, only the portion below that threshold had been deducted for tax purposes. The remaining portion had been added back for tax purposes.

In 2016, the company benefited from a debt forgiveness related to this loan interest. At that time, it recognized taxable extraordinary income but determined that the portion of the interest that had not been deducted for tax purposes should not be taxable.

Following a tax audit,administration questioned the lack of full taxation of the debt forgiveness.

The Administrative Court of Appeal, to which the case was referred, ruled that "no statutory or regulatory provision, nor any legal principle, permits a company that has benefited from a debt waiver to limit the amount of tax on the proceeds to the amount of the expense that was tax-deductible in previous years."

The Court will further hold that the debt forgiveness and the interest charged to the company are "tax-independent" transactionsand that they "are subject to different rules regarding the determination of taxable income in the case of the former and the amount deductible from taxable income in the case of the latter."

The Court thus upholds the tax assessment.

CAA Versailles, Jan. 8, 2026, No. 23VE02202

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