The Supreme Court clarifies anti-avoidance provisions.
Sums paid to an employee or an executive on the termination of his duties may be tax exempt under certain limitations.
A termination payment is tax exempt in whole when it does not exceed the minimum amount provided by the law or the applicable collective agreement.
When the payment exceeds the legal minimum as would generally be the case, the tax exempt portion corresponds to the higher of (i) two times the gross annual remuneration of the preceding calendar year or (ii) 50% of the total termination payment. The tax exempt portion is in both scenarios capped at EURO 212,112 in 2011 (this amount is adjusted on a yearly basis).
It is common practice in multinational groups that an executive holds different positions in several group companies and that his duties with the respective group companies are terminated simultaneously. The question arose in the past as to how the above legal limitations could be applied to the various termination indemnities paid to such executive. This question was settled in the sense that the termination indemnities have to be aggregated to calculate the tax exempt portion. To determine the maximum tax exempt amount, all payments received by the same beneficiary in relation to the simultaneous termination of duties carried out in several companies of the same group must be aggregated.
The objective of the law was also to target and prevent certain abusive tax structuring of termination packages within group of companies.
Supreme Court decision
In a decision dated 10 December 2010, the Supreme Court clarified its position regarding the anti-abuse system of totaling indemnities. Sums paid to the same beneficiary must be aggregated to calculate the tax exempt amount only if the different payments originate from a unique decision to terminate the different duties of the beneficiary. The formal termination decisions taken by different group companies are presumed to originate from a unique decision when one company is under the control of the other or when the companies are under the direct or indirect control of the same shareholder (common control).
A taxpayer who held the positions of both employee managing director and member of the managing board of a subsidiary A and managing director of a subsidiary B of the same group of companies had been terminated by both group companies and had received termination indemnities from each company in which his duties were carried out. The different payments were treated separately for the calculation of the tax exempt indemnity. The French tax administration took a different approach and considered that the different payments had to be aggregated to determine the maximum exempt amount. The lower administrative tribunal confirmed the position of the tax auditor but its decision was cancelled by the administrative appeal court on the grounds that applicable statutory provisions did not provide for the totalization of indemnities paid in respect of several termination decisions taken by different companies. On the appeal of the French tax administration, the French Supreme Court confirmed its previous position on the aggregation of indemnities paid by different companies as a consequence of a unique termination decision.
Conseil d’Etat 10 December 2010 n° 303722, Ministry of Finance vs. Laureau
For further information or to discuss any of the issues raised please contact Pascal Ngatsing on +33 1 53 93 94 00