• Carried-Forward Tax Losses May Be Offset Against Tax Profits Only After All Expenses have been Deducted
  • May 15, 2015 | Authors: Nicolas Andre; Siamak Mostafavi
  • Law Firm: Jones Day - Paris Office
  • Pursuant to the French tax code, corporation income tax is applied on the net accounting profits, as adjusted for French tax purposes. Tax losses available for carry-forward are deemed to constitute an expense for corporation income tax purposes, even though they do not constitute an expense from an accounting standpoint.

    Under certain specific circumstances, and in particular since the introduction of a limitation to the amount of tax losses available for carry-forward (whereby, in a nutshell, tax losses may be used only to the extent of 50 percent of the relevant profits that are in excess of 1 million euros), several disputes thus arose between taxpayers and the FTA as to when tax losses available for carry-forward could be deducted from the net accounting profits.

    Taxpayers argued that, on the basis that tax losses available for carry-forward were deemed to constitute an expense for corporation income tax purposes, they could be deducted from the net accounting profits before other similar tax adjustments are made to such net accounting profits (such as amortizations and depreciations). The FTA however considered that tax losses available for carry-forward could be deducted (subject, where relevant, to any limitation applicable) only once all expenses have been deducted, including those arising from the French tax code (such as amortizations and depreciations).

    In an April 2015 decision (Conseil d'Etat, April 10, 2015, Fayat), the Conseil d'Etat has confirmed the position taken by the Appeal Court of Versailles in an April 2013 decision: Carried-forward losses may be offset against the net accounting profits only once all expenses, including those provided for by the French tax code (such as amortizations and depreciations), have been deducted. As a result, amortizations and depreciations must be deducted from the net accounting profits before finalizing that amount and offsetting (subject, where relevant, to any limitation applicable) any tax losses available for carry-forward.