Deemed distributed income
A corporate income tax reassessment often carries over to the director or the shareholder: sums treated as having left the company are taxed in their hands as distributed income. Current-account advances, personal expenditure, remuneration held to be excessive, hidden distributions: the risk is twofold, at the level of the company and of the individual. The firm defends both fronts in a coordinated manner.
- Principle
- Sums neither placed in reserves nor incorporated into capital are deemed distributed (French Tax Code art. 109)
- Typical cases
- Advances to shareholders, non-deductible expenses, excessive remuneration (French Tax Code art. 111)
- Beneficiary
- Taxation in the hands of the director or the shareholder as income from movable capital
- Aggravation
- Increase in the income-tax base for irregular distributions
- Two fronts
- The reassessment strikes the company (CIT) and the individual (income tax)
The principle of deemed distributed income
For corporate income tax purposes, all profits that are neither placed in reserves nor incorporated into capital are treated as distributed (French Tax Code art. 109). When the tax authorities increase a company's result, the supplement is, in principle, regarded as distributed and taxed in the hands of the beneficiary.
Article 111 of the French Tax Code also covers distributions by their very nature: advances, loans or payments on account granted to shareholders, expenses and charges not allowed as deductions, the excessive fraction of remuneration. It is this mechanism that turns a company reassessment into personal taxation.
The most frequent cases
Recharacterisation as distributed income turns a sum that has left the company into income taxable in the hands of its beneficiary, shareholder or director. It covers recurring situations:
- Unrepaid debit balances on a shareholder current account;
- Personal expenditure borne by the company;
- Remuneration or benefits held to be excessive in light of the service rendered;
- Expenses reinstated as not incurred in the interest of the business;
- Hidden distributions, whose beneficiary is questioned (French Tax Code art. 117).
This ground is often the extension of an abnormal act of management: the defence must address both together.
Taxation of the beneficiary
Distributed income is taxed in the hands of the beneficiary as income from movable capital. Irregular or hidden distributions are subject to an aggravation: the base used to calculate income tax is increased, which appreciably raises the total. Social levies and, where applicable, penalties may be added to this.
Our lines of defence
The defence is conducted on both levels. At the level of the company, contesting the reassessment at source (reality of the expense, interest of the business). At the level of the individual, discussing the very existence of the distribution (a debit current account may be repaid or justified), the identity of the beneficiary (the appropriation of the sums must be established), the base and the increase, as well as the penalties. The firm coordinates the defence of the company and of the director to avoid contradictions.
Deemed distributed income: your questions
Is a debit balance on a current account taxable as a distribution?
Advances, loans or payments on account granted to shareholders are presumed to be distributed (French Tax Code art. 111 a). The presumption may nevertheless be rebutted, in particular if the sum is repaid or corresponds to a justified transaction. Evidence and documentation are decisive.
Why does my company reassessment affect me personally?
Because sums treated as having left the company are deemed distributed and taxed in the hands of the beneficiary (French Tax Code art. 109 and 111). A single reassessment thus strikes the company at CIT level and the director at income-tax level.
What is a hidden distribution?
A distribution whose beneficiary is not spontaneously identified. The tax authorities may ask the company to name them (French Tax Code art. 117); failing that, specific consequences apply. The taxation of irregular distributions is moreover aggravated.
Can double taxation of the company and the director be avoided?
The defence aims precisely to call into question the distribution itself, its amount or its appropriation by the beneficiary. A coordinated strategy between the company and the individual is essential so as not to weaken one through the other.
Why a tax lawyer?
Because the defence requires handling the litigation of the company and of the director simultaneously, under professional secrecy, up to the tax judge if necessary.
A recharacterisation as distributed income?
A confidential first exchange to coordinate the defence of the company and of the director, and to discuss the existence, the base and the penalties of the distribution.
This page presents the regime of deemed distributed income for information purposes; each matter calls for a specific analysis. References to the French Tax Code (art. 109 to 111, 117) in force at the date of writing.