Tax alert 03 May 2018

Compensation tax: new indications on sectoring, staff allocation and prorata

Three new rulings on April 19th 2018* of the Nantes Administrative Court of Appeal shed new light on compensation tax issues, notably on (i) sectoring justifications, (ii) presumption of transversal activities for managers, and (iii) dividend tax as calculated in the liability report.

Sectoring and justifications

In the first ruling (Nantes ACA, April 19 2018, 16NT01807, SA Vallogis), a company that is partially subject to VAT requests reimbursement of part of the paid compensation tax as its activities could be divided into sectors. The tax administration rejected the claim due to insufficient justification of sectoring by the company.

In this specific case, the Administrative Court explained that by providing a simple chart listing the alleged sector by employee, the company did not bring forward sufficient detail and justification of the nature of its activities and operations, and did not prove that they have implemented separate accounting, to justify the existence of different sectors within the company. Consequently, sectoring can only be proven using specific material that highlights distinct activities and operations, especially regarding affected staff.

Proving that managers do not hold transversal functions

In the second ruling (Nantes ACA, April 19 2018, A6NT02088, SARL HDM), a parent company’s operations make it partially subject to VAT and the company pays compensation tax for operations not subject to VAT. The tax administration decided that compensation for several executives was required to appear in the compensation tax liability report by virtue of the financial and taxable sector general presumption of joint allocation of managers (see CE, June 8 2011, 4 rulings, 331848, 331849, 341018 and 340863, Sofic).

However, the Administrative Court of Appeal first issued a reminder that the presumption can be

overruled if the company proves that managers are not allocated in the financial sector (for deputy CEOs, see Paris ACA, January 21 2015, N° 14PA02737). It added that this type of proof can be brought forward when one of the executive managers has no control or liability in the matter.

Impact of dividends in tax liability reports

In its last ruling (Nantes ACA, April 19 2018, 16NT02041, SAS Groupe Monin), a mixed-activity parent company disputed the inclusion of dividends (outside of VAT scope) in the compensation tax liability report’s numerator. The Administrative Court of Appeal, in direct application of a recent ruling of the State Council (CE, February 14 2018, N°410302, Nord Provence Finances – see also our Tax alert: Compensation tax and mixed-activity parent companies: hopes are up), ruled that dividends must be taken into account in the numerator of tax liability reports. This ruling is one of the first applications following the Nord Provence Finances case.

These three rulings are interesting from an application point of view:

  1. An implicit reminder is issued that sectoring in compensation tax is legally binding (see CE, July 28 1999, N°164100). However, proof of sectoring may in no way be limited to one criterion illustrating the participation of employees in taxable operations. The company must detail and prove the nature of operations and allocated means.
  2. A company may remove itself from the presumption of holding transversal functions for managers, as stated in Article L.225-56 of the French Commercial Code, by proving the absence of mixed allocation, especially when an executive has no control or liability regarding the company. The company may prove lack of mixed allocation with work contracts, pay slips, as well as Board of Administrators deliberations.
  3. Dividends must be taken into account in the numerator of the compensation tax liability report. This confirms, once again, that liability reports do not counter VAT pro-ratas.


*In the current state of affairs, there is no proof that these rulings have been subject to appeals.