Council of State, Plenary session, 27 July 1988, 50020, published in the Recueil Lebon

Council of State - PLENARY

 

ruling

au contentieux

- N° 50020

- Published in the Recueil Lebon

Reading of Wednesday 27 July 1988

President

Mr Ducamin

Rapporteur

Mr Turquet de Beauregard

Public Rapporteur

Mr Fouquet

Full text

FRENCH REPUBLIC

IN THE NAME OF THE FRENCH PEOPLE

Having regard to the application, registered on 16 April 1983 at the Secretariat of the Contentious Division of the Council of State, submitted by the company 'BOUTIQUE 2M', a limited liability company with its registered office at ..., represented by its manager in office, and requesting that the Council of State ..:

°1 annul the judgment of 17 March 1983 by which the administrative court of Lyon rejected her request for the discharge of the corporate tax contributions to which she was subject for the years 1974, 1975 and 1977,

2. grants her the discharge of the contested taxes,

Having regard to the other documents in the file;

Having regard to the general tax code;

Having regard to the code of administrative courts;

Having regard to the order of 31 July 1945 and the decree of 30 September 1953;

Having regard to the law of 30 December 1977;

After having heard :

- the report of Mr. Turquet de Beauregard, Maître des requêtes,

- the conclusions of Mr. Fouquet, Government Commissioner;

Considering that the contested tax increases, established in respect of corporation tax for the years 1974, 1975 and 1977, result from the fact that the administration considered, on the one hand, that the company "BOUTIQUE 2M", which runs a women's clothing sales business, wrongly included in general expenses travel expenses corresponding to trips to Sweden by one of the company's partners and thus performed an abnormal act of management, on the other hand, that the payment, during the years 1974, 1975, 1976 and 1977, of commissions of 6%, then 7%, made by the company "BOUTIQUE 2M" to the Swedish company "Hennes-Mauritz Ab", its sole supplier, concealed a transfer of profits abroad and reinstated the amount in the results, on the basis of the provisions of article 57 of the general tax code;

Considering that under the terms of Article 57 of the General Tax Code, applicable to corporation tax by virtue of Article 209 of the Code: "For the establishment of the income tax due by companies that are dependent ... of companies located outside France, the profits indirectly transferred to the latter, either by way of an increase or decrease in purchase or sale prices or by any other means, are incorporated into the results shown in the accounts ... " ; that these provisions, subject to the administration having established the existence of a link of dependence between the company located in France and the company located outside France as well as price increases or decreases, or similar means of transferring profits, institute a presumption weighing on the company liable for corporation tax, which can only obtain, through litigation, the discharge or reduction of the tax assessed as a result by providing proof of the facts which it relies on to show that there has been no transfer of profits;

Considering that, if the assessment of the abnormal character of a management act poses a question of law, it is, as a general rule, up to the administration to establish the facts on which it relies to invoke this abnormal character; that this principle can, however, only be applied in compliance with the legislative and regulatory prescriptions which, in tax litigation, govern the burden of proof;

Considering that the determination of the burden of proof stems, primarily, in the case of companies subject to corporation tax, from the nature of the accounting operations to which the management acts whose character is contested by the administration have given rise ; that, if the act contested by the administration was translated, in accounting, by an entry bearing, as it is the case in the present case, with regard to travel expenses, on expenses of the nature of those which are referred to in article 39 of the same code and which are deducted from the net profit defined in article 38 of the code, the administration must be deemed to provide the proof which is incumbent on it if the taxpayer is not, the taxpayer is not himself able to justify, in its principle as in its amount, the accuracy of the entry in question, even if, because of the procedure implemented, he would not have been, in this respect, obliged to provide such a justification;

Considering that, when there is a disagreement between the taxpayer and the administration on questions of fact, whether it concerns the materiality of the facts themselves or the assessment that should be made of the facts, having regard, in particular, to the real situation of the company or to the practices of the trade or industry to which it belongs, this disagreement may, by virtue of the provisions of Article 1649 quinquies A of the General Tax Code, taken up again in Article L.59 of the book of tax procedures, be submitted to the assessment of the departmental commission of direct taxes and taxes on turnover at the initiative of the taxpayer or at that of the administration; that, when the latter has followed the opinion of the commission, duly expressed, it is up to the taxpayer, in any case, to demonstrate, before the judge of the tax, the factual elements of which he avails himself;

Considering that it results from the instruction that, on the two heads of rectification mentioned above, the disagreement was brought before the departmental commission of direct taxes and taxes on the turnover; that, contrary to what the applicant maintains, it is clear from the terms of the opinion issued by the said commission on 7 May 1979 that it took sides, in a sufficiently reasoned, albeit succinct, manner, on the facts which were submitted to its assessment; that the disputed taxes having been established in accordance with the position taken by the commission in its opinion, the latter is enforceable against the company "BOUTIQUE 2M";

Considering that the latter does not contest, with regard to travel expenses, that these expenses correspond to travel expenses made in Sweden for private purposes by one of its associates, of Swedish nationality, employed as a saleswoman; that, if it maintains that these trips were useful to the company by allowing necessary contacts with the supplier, it does not provide proof of these contacts; that it follows that the assumption of these expenses constituted an abnormal act of management authorising the administration to exclude the amount for the calculation of the taxable profit ;

Considering that, with regard to the "commissions" paid by the company "BOUTIQUE 2M" to the Swedish company "Hennes-Mauritz AB", the administration establishes the existence of the link of dependence of the former with regard to the latter, of which it avails itself, as well as the materiality and the amount of the payments; that, however, the company "BOUTIQUE 2M" justifies, for its part, that the Swedish firm gave it effective support to develop sales in France while invoicing it for the goods on the basis of its own purchase prices plus only transport costs; that, in view of the particularly advantageous conditions that it had thus been granted in the interest of its own business, 'BOUTIQUE 2M' provides proof that, contrary to what the departmental tax commission considered, the payments made to 'Hennes-Mauritz AB' actually involved commercial considerations of at least equivalent value for it, which prevented them from being reintegrated by application of the above-mentioned provisions of Article 57 ; that, consequently, the applicant company is entitled to maintain that it is wrongly that, by the contested judgment, the administrative court rejected its request insofar as it relates to the reintegration of the said commissions, i.e. 15,124 F, 22,306 F, 22,367 F, 15,343 F respectively in 1974, 1975, 1976 and 1977;

Article 1: The results of the company "BOUTIQUE 2M", for the purposes of corporate tax liability for the years 1974, 1975 and 1977, shall be calculated without taking into account the reintegration of the sums of FRF 15,124, FRF 22,306, FRF 22,367 and FRF 15,343, which had been made on the declarations filed for the years 1974, 1975, 1976 and 1977 respectively.

Article 2: The company "BOUTIQUE 2M" is discharged from the difference between the amount of the supplementary corporation tax to which it was subject for the years 1974, 1975 and 1977 and the amount of those resulting from the bases mentioned in article 1 above.

Article 3: The judgement of the Lyon Administrative Court dated 17 March 1983 is reversed insofar as it is contrary to the present decision.

Article 4: The remainder of the conclusions of the request of the company "BOUTIQUE 2M" is rejected.

Article 5: The present decision will be notified to the company "BOUTIQUE 2M" and to the Minister of State, Minister of the Economy, Finance and Budget.

 

Analysis

- Abstrata

19-04-02-01-04-082 TAXES - INCOME AND PROFIT TAXES - TAXABLE INCOME AND PROFIT - SPECIAL RULES - INDUSTRIAL AND COMMERCIAL PROFITS - DETERMINATION OF NET PROFIT - ANORMAL MANAGEMENT ACTIVITIES - Burden of proof - Proof incumbent on the taxpayer in the case of a reassessment based on Article 57 of the C. The burden of proof lies with the taxpayer in the case of an adjustment based on article 57 of the C.G.I. and established in accordance with the opinion of the departmental commission.

19-04-02-01-06-01-04 CONTRIBUTIONS AND TAXES - INCOME AND PROFIT TAXES - TAXABLE INCOME AND PROFIT - SPECIAL RULES - INDUSTRIAL AND COMMERCIAL PROFITS - ESTABLISHMENT OF TAX - ACTUAL PROFIT - QUESTIONS CONCERNING PROOF (1) Burden of proof incumbent on the taxpayer - Taxes established on the basis of article 57 of the C. G. I. in accordance with the opinion of the departmental commission. (1) Burden of proof on the taxpayer - Taxes established on the basis of Article 57 of the C.G.I. in accordance with the opinion of the departmental commission. (2) Burden of proof incumbent on the administration - Absence - Taxes established on the basis of article 57 of the C.G.I. in accordance with the opinion of the departmental commission.

- Summary

19-04-02-01-04-082, 19-04-02-01-06-01-04(1), 19-04-02-01-06-01-04(2) If the assessment of the abnormal nature of a management act poses a question of law, it is, as a general rule, up to the administration to establish the facts on which it bases itself to invoke this abnormal nature. However, this principle can only be applied in compliance with the legislative and regulatory provisions governing the burden of proof in tax litigation. The determination of the burden of proof stems mainly, in the case of companies subject to corporation tax, from the nature of the accounting operations to which the management acts challenged by the administration gave rise. If the act contested by the administration has resulted, in the accounts, in an entry relating, as is the case here, to travel expenses, to charges of the nature of those referred to in Article 39 of the same Code and which are deducted from the net profit defined in Article 38 of the Code, the administration must be deemed to provide the proof which is incumbent on it if the taxpayer is not, himself, able to justify, in principle as well as in amount, the accuracy of the entry in question, even if, because of the procedure implemented, he would not have been required to provide such a justification in this respect. When there is a disagreement between the taxpayer and the administration on questions of fact, whether it concerns the materiality of the facts themselves or the assessment that should be made of the facts, particularly with regard to the real situation of the company or the trade or industry practices to which it belongs, this disagreement may, by virtue of the provisions of Article 1649 quinquies A of the CGI included in Article L.59 of the tax procedure book, be submitted to the assessment of the departmental commission of direct taxes and turnover taxes at the taxpayer's initiative or that of the administration. When the latter has followed the duly expressed opinion of the commission, it is, in any case, up to the taxpayer to demonstrate, before the tax judge, the factual elements he is relying on. As the taxes were established in accordance with the opinion of the departmental commission, it is up to the company to prove the contrary, with regard to the adjustments made by the administration on the basis of Article 57 of the CGI.