Abnormal act of management: the operations that flag the tax office

Quick answer. An abnormal act of management is one through which a company chooses to impoverish itself for purposes unrelated to its own interest (French Conseil d'État, Société Croë Suisse, 2018). The tax authorities can then add the expense back or reconstruct the abandoned income, triggering a tax reassessment.

The abnormal act of management is not an offence written anywhere in the French tax code. It is an exception built by case law, limiting a much broader principle: the director's freedom to manage the company as they see fit. Knowing where that line falls keeps a perfectly legitimate decision from turning into a tax reassessment.

In the files we handle, the problematic operations are almost never fraudulent. They are good-faith arrangements, poorly documented, between a company and its director, its holding company or a sister company. It is precisely this grey area that this article seeks to clarify.

The starting point is not the abnormal act, it is the freedom of management. The tax authorities do not judge whether an expense was advisable, whether a strategic choice was relevant, or whether a decision turned out badly. A director is entitled to make mistakes, to invest too early, to negotiate a contract poorly. Commercial risk is part of business life.

The abnormal act of management is the exception to this principle. It allows the tax office to add an expense back to the taxable result, or to reconstruct income the company voluntarily gave up, where the operation defies any logic of corporate interest. The nuance is essential: a bad choice is not held against you, a choice unrelated to the company's interest is.

The benchmark definition was set by the Conseil d'État sitting in plenary tax formation, in the Société Croë Suisse case of 2018: an abnormal act of management is one through which a company chooses to impoverish itself for purposes unrelated to its own interest. This wording distils decades of case law and remains the current reading.

Impoverishment alone is not enough. The court requires two distinct elements to be present together.

The objective element is the measurable impoverishment. The intentional element is the awareness of acting against the corporate interest. Without these two conditions combined, there is no abnormal act of management, merely an act of management that is questionable commercially, which authorises no reassessment.

This intentional requirement is what separates a management error, not punishable for tax purposes, from an abnormal act, which is. A director who sells poorly is not in the same position as one who gives away an asset to benefit a relative.

The allocation of the burden of proof is a decisive point, often misunderstood.

It is in principle for the tax authorities to establish that the act is abnormal. You do not have to demonstrate upfront that every one of your decisions serves the corporate interest. In practice, however, the balance shifts quickly: faced with an operation that appears abnormal, it is the quality of your documentation that tips the scales. A price justified by a valuation, a written agreement, a real and quantifiable consideration radically change the outcome of an audit.

Our reading. The theoretical burden of proof favours you, but do not rely on it alone. In a real file, the inspector builds on the appearance of abnormality, and it is up to you to rebut it with evidence. Documentary proof prevails over the principle.

Some operations mechanically attract the inspector's attention because, by their very nature, they imply possible impoverishment without consideration. Here they are.

• Manifestly excessive remuneration of a director relative to the work actually performed.
• Interest-free loan or advance granted to a third party without consideration.
• Unjustified waiver of a receivable in favour of a customer or a related company.
• Sale of an asset at an abnormally low price.
• The company bearing a personal expense of a shareholder or director.
• Guarantee given for a related company without consideration for the guaranteeing company.
• Service rendered to a third party without corresponding invoicing.
• Fictitious or manifestly overvalued management fees between companies of the same group.

Each of these operations may be perfectly justified. The problem arises not from the operation itself, but from the absence of demonstrable consideration for the company that impoverishes itself. The table below summarises the risk attached to each case.

What the tax office looks at. The inspector first looks for an asymmetry: a company bearing a cost or giving up income, and a beneficiary profiting from it without real consideration. They are particularly interested in flows between related parties, where personal interest may override corporate interest.

When an abnormal act of management is established, the consequences stack up and often hit two taxpayers at once.

On the company side, the undue expense is added back to the taxable result, generating a corporate tax reassessment. Late-payment interest and, depending on the case, surcharges are added. On the beneficiary side, the advantage granted may be taxed as deemed distributed income, particularly where it benefits a shareholder or the director. A single poorly framed operation can thus cost twice: at company level and at the level of the individual who benefited.

The underestimated risk. Many directors think in silos and only anticipate the reassessment at company level. Double taxation, at company level and then at beneficiary level as deemed distributions, is the most common nasty surprise. It is what turns a moderate reassessment into a heavy bill. To understand how an audit unfolds, our article on the tax audit of companies details the stages, and the one on the notice of adjustment and the 30-day reply window explains how to respond effectively.

A risky operation is not a forbidden operation. It is secured upstream, through proof of its consideration. Here is the approach we apply on sensitive files.

1. Identify the real consideration for the company taking on the commitment, and state it clearly before the operation.
2. Document this consideration in writing: agreement, quote, valuation report, market comparison.
3. Set the financial terms at market price, including interest for a loan, and keep a trace.
4. Have regulated agreements approved by the competent body where the operation involves a director or a shareholder.
5. Keep evidence of actual performance, not just of the decision.
6. Periodically review recurring flows between related companies, particularly management fees.

In practice. A written agreement is not enough if it remains an empty shell. The inspector looks for the reality of performance. For management fees, for example, it is the reports, deliverables and time spent that make the difference, not the contract alone. Our dedicated analysis of management fees examines the conditions for their deductibility in detail.

Some situations call for a finer reading, because case law allows for important nuances there.

Intragroup operations#

Flows between companies of the same group are a classic terrain. A service, a loan or an invoice between a holding company and its subsidiary is not abnormal by nature, but it must rest on real consideration and a coherent price. Cash upstreaming between related companies calls for particular attention: our article on cash upstreaming within a holding company sets out the terms, as does the one on holding company optimisation. The shareholder current account follows the same logic: an advance must be remunerated at a normal rate, failing which the absence of interest may be recharacterised.

Aid to a subsidiary in difficulty#

Aid to a subsidiary in difficulty is one of the most delicate cases. A waiver of a receivable or an advance may be justified by the own interest of the company providing the aid, particularly where it has a direct commercial or financial interest in its subsidiary's survival. But this justification must be demonstrated and quantified. Aid driven solely by group solidarity, without an established own interest, exposes the company to recharacterisation. The line is drawn on demonstrating the interest of the party granting the aid.

Director remuneration#

A director may set their remuneration freely, and high remuneration is in no way abnormal in itself. The risk arises where remuneration becomes manifestly excessive relative to the work actually performed, the company's results and sector practice. Only the excessive portion is then added back, not the entire amount. Traceability of the director's actual role, duties and their intensity is the best safeguard.

Trade-off. Between paying a comfortable remuneration and distributing a disguised advantage, the first option is almost always preferable. An assumed, declared and contributed remuneration is debated on its amount. A hidden advantage, by contrast, stacks add-back, deemed distribution and surcharges. A clear, well-calibrated flow is worth more than an arrangement that has to be defended item by item.

In family SME files, one pattern recurs regularly: the company bears expenses with a personal flavour for the director, non-business travel costs, privately used equipment, or re-invoices services between companies of the same group with nothing tangible behind the invoice. As long as things go well, these flows go unnoticed. It is during an audit that the question of consideration arises, often several financial years later. The reflex to develop is simple: before each atypical flow, ask what the consideration is for the company, and document it on the spot. A clean file is built calmly, never under the pressure of a notice of adjustment.

The theory of the abnormal act of management does not depend on an annual text, it rests on stable case law from the Conseil d'État. The principles set out here remain current. What evolves is the inspectors' areas of focus, which increasingly concentrate on flows between related parties: management fees, current accounts, intragroup cash agreements. Securing them starts with the quality of documentation, a point where regular accounting and legal support makes the difference. The firm acts on these matters within its missions of corporate tax advice, bookkeeping and review and legal advice.

• The abnormal act of management is the exception to the freedom of management: the tax authorities can add back an expense or reconstruct income where the company impoverishes itself for purposes unrelated to its own interest.
• Two elements are required: an objective impoverishment and the awareness of acting against one's own interest.
• The burden of proving abnormality lies in principle with the tax authorities, but your documentation is what truly makes the difference in an audit.
• Flows between related parties are the primary risk area: management fees, current accounts, interest-free loans, personal expenses borne by the company.
• The consequences stack up: a tax reassessment for the company and possible taxation of the advantage at beneficiary level as deemed distributions.
• A sensitive operation is secured upstream through real, quantified and documented consideration.