Avoiding the payment of employee profit-sharing may sometimes help avoid a finding of improper management

A company that operates a luxury hotel in Paris and is part of an international group had financed the renovation of the building that was to house the hotel by taking out loans from a group company located abroad.

In light of the losses incurred by the French company, the foreign company agreed to waive part of its claim in 2011, while including a clawback clause in the event that the French company returned to profitability in 2017 or during the following nine years.

In 2013, the French company transferred the building to one of its subsidiaries and realized a significant capital gain.

It also amended the debt forgiveness agreement to provide that the better-fortune clause would apply if it returned to profitability on or after January 1, 2013, and no later than 2023.

Changes to these terms and the realization of capital gains in 2013 led to the clause being triggered that year and a payment of 13.4 million to the foreign company. This amount was recorded as an expense by the French company.

Following a tax audit,administration , among other things, that changing the effective date of the better fortune clause—knowing full well that this would result in its activation in 2013—constituted an abnormal management decision.

The Administrative Court of Appeals, to which the case was referred, noted, however, that:

• The early activation brought the maturity date forward from 2027 to 2023, thereby reducing the likelihood of the loan being repaid

• The deduction of the reimbursement in 2013 made it possible to "avoid the immediate payment of nearly 1.2 million euros in employee profit-sharing," which "would have amounted to virtually the company's entire cash reserves"

The Court will then rule that the company did indeed have an interest in triggering the better fortune clause and will therefore overturn the tax assessment.

CAA Paris, May 29, 2026, No. 24PA04610

This legal watch produced by Mispelon Avocat, a law firm specializing in French tax audit and French tax litigation. You can follow this legal watch subscribing to the newsletter via this link.