In a recent Court Case, the French High Court has given interesting specifications regarding the free advances or loans (CE, June 21, 1995, no. 132.531). The case facts were the following: some reserves booked by a company issued from free advances granted to third companies and not meeting the arm's length principle, had been added back by the Tax Authorities. The French Tax Authorities had also considered as not meeting the arm's length principle the exemption of interests granted in this respect and added back to the taxable income the amount of the interests which should have been received.

However, insofar as the adding back of the involved reserves related to advances for which the company was sure never to be refunded, necessarily implies that these advances were actually sinking funds, the granting of such reserves did not trigger a relationship of lender to borrower between the parties, thus justifying the payment of interests. Consequently, the French High Court had considered that the Tax Authorities could not validly add back the interests not received from these advances to the taxable results of the company.

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