• Abnormal Act of Management between a French Bank and Its Foreign Branch
  • July 13, 2015 | Authors: Nicolas Andre; Siamak Mostafavi
  • Law Firm: Jones Day - Paris Office
  • In a decision dated March 19, 2015, the Conseil d’Etat ruled on the exposure of the head office/foreign branch relations with regard to the so-called abnormal act of management doctrine (acte anormal de gestion), under which the FTA are entitled to reassess from a tax standpoint the consequences of corporate decisions resulting in expenses or losses not justified by the corporate interest of the company.

    In the case at hand, a French bank, acting from its head office, had entered into an agreement with its UK branch, whereby the head office undertook to guarantee a reference price for the disposal of a bond portfolio held by the UK branch, equal to the market price of the portfolio the day the agreement was entered into. In return, the UK branch had to pay to its head office a fee equal to 0.25 percent of the portfolio’s value, and eventually to 10 percent of any potential capital gain in case the disposal price exceeded the aforementioned reference price.

    This arrangement led to the recognition of a provision and a loss in the accounts of the French bank, the deduction of which was challenged by the FTA within the course of a tax audit, based on the abnormal act of management doctrine.

    The Conseil d’Etat overturned the decision of the Appeal Court of Versailles which had sided with the taxpayer, by ruling that, in order to determine whether the transaction constituted an act contrary to the French bank’s corporate interest, the lower court failed to examine whether the transaction formed part of trade relations aiming at safekeeping or developing the French bank’s business in France. The Appeal Court Versailles will have to reexamine this case in light of this decision.