Interest received from share loans is taxable as income from liquid capital LégiFiscal

Background of the case ¶

On October 18, 2022, the Council of State overturned a judgment of the Administrative Court of Appeal in Paris, which favored the plaintiffs in a share loan case that was found to be fraudulent (Council of State, n°461703 , October 18, 2022).

Participation Loans That Look Like a “Ponzi Pyramid” ¶

Share lending is a special form of business financing. It consists in sustainable financing of a company, but is not considered a loan or an entry into share capital, but as “quasi-equity”.

Between 2013 and 2017, the plaintiffs entered into share loan agreements with a Spanish company. As such, interest was received and regularly stated in the income from liquid capital (RCM) of the income tax. In the summer of 2017, an investigation was initiated against the manager of the company that manages the equity loans. This revealed that the funds lent by some of the new investors were used to remunerate and repay the first. Knowing these facts, the plaintiffs wanted to reconsider the amounts received in 2015 and 2016, no longer as taxable interest, but as repayments of capital that are not taxable.

The Council of State annuls the judgment of the Administrative Court of Appeal ¶

An initial complaint was filed and rejected by the tax authorities. The taxpayers then filed a case with the administrative court in Melun, and the latter also rejected their request. In the winter of 2021, the Administrative Court of Appeal in Paris accepts the arguments leading to a reduction of the income tax base and subsequently to a tax reduction. The Minister for Economy, Finance and Recovery then appealed to the Court of Cassation.

The Council of State annuls the judgment and finds that the appellate judges mischaracterized the facts which, upon discovering the fraud in 2017, led them to reclassify the amounts received in 2015 and 2016 not as remuneration from the company’s profits, but as originating from fictitious loans and therefore reclassified the amounts collected as repayments of capital to that extent. To contradict the CAA, the State Council notes that the plaintiffs have indeed collected the consideration, but also obtained full repayment of their borrowed capital.

Source: State Council, no. 461703, 18 October 2022

Court of cassation of ,

The qualification of the fraudulent nature of a home equity loan in a “Ponzi pyramid” type entity is not enough to make the interest received non-taxable.

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