The excessive remuneration of the executive
Have the tax authorities found your executive's remuneration excessive and refused to deduct part of it? Remuneration is deductible only if it corresponds to genuine work and is not excessive in light of the service rendered. The fraction deemed excessive is added back and, frequently, taxed as deemed distributed income in the hands of the beneficiary. The ground is factual and can be defended. The firm challenges both the characterisation and the base.
- Principle
- Remuneration deductible if it reflects genuine work and is not excessive (French Tax Code art. 39, 1, 1°)
- Excess
- The excessive fraction is added back to the company's taxable result
- Beneficiary
- The excessive part may be taxed as deemed distributed income in the executive's hands
- Criteria
- Genuine work, responsibilities, results, comparables, size of the business
- Evidence
- In principle on the tax authorities; documentation is decisive
When is remuneration deductible?
Remuneration paid to an executive is deductible from the company's result only if it meets two cumulative conditions (French Tax Code art. 39, 1, 1°): it must correspond to genuine work, and it must not be excessive in light of the service rendered. The company is free to set the level of remuneration, but the tax authorities may set aside the fraction they consider disproportionate.
Excessive remuneration is a form of abnormal act of management: the company is regarded as having impoverished itself, for the benefit of the executive, beyond what its own interest justifies.
How the excessive character is assessed
The excessive character is assessed through a body of evidence, on a case-by-case basis:
- The nature and extent of the functions actually carried out, and the responsibilities assumed;
- The results of the business, its turnover, its size and its sector;
- The comparison with the remuneration of executives carrying out similar functions in comparable businesses;
- The consistency over time of the remuneration and its evolution.
No single criterion is decisive in itself. It is the combination of these elements, and the quality of their demonstration, that carries the court's conviction.
The consequences of the reassessment
The fraction deemed excessive is added back to the company's taxable result, which increases its tax. That same fraction is moreover frequently characterised as deemed distributed income in the executive's hands (French Tax Code art. 111, d, which covers the non-deductible fraction of remuneration; and, as a general reference, art. 109, 1, 1°), and taxed on that basis, with late-payment interest and, where applicable, penalties (French Tax Code art. 1729). The reassessment thus strikes both the company and the executive, which increases what is at stake.
Securing and defending
Upstream, the firm helps to document and formalise the remuneration (corporate resolutions, description of functions, comparison data, indexation on results). During an audit, the defence demonstrates the reality of the work and the justification of the amount, challenges the comparables retained by the tax authorities and the characterisation as an abnormal act of management, and discusses the double taxation as distributed income and the penalties. The firm carries the dispute before the tax court where necessary.
Excessive remuneration of the executive: your questions
Can the tax authorities find my remuneration excessive?
They do not set the remuneration, but they may refuse to deduct the fraction they consider disproportionate in light of the service rendered (French Tax Code art. 39, 1, 1°). That fraction is then added back to the company's result.
On what criteria is the excessive character based?
On a body of evidence: actual functions and responsibilities, results and size of the business, comparison with executives carrying out similar functions in comparable businesses, and consistency over time.
Is the excessive fraction taxed in the executive's hands?
Often yes: it may be characterised as deemed distributed income (French Tax Code art. 111, d, covering the non-deductible fraction of remuneration; as a general reference, art. 109, 1, 1°) and taxed in the executive's hands, in addition to the add-back at company level. The reassessment therefore strikes both.
Who bears the burden of proof?
In principle the tax authorities, who must establish the excessive character. But the quality of the documentation produced by the business is decisive in reversing that assessment.
How can one guard against this?
By formalising the remuneration through corporate resolutions, describing the functions precisely and gathering comparison data. Remuneration that is documented and consistent withstands an audit far better.
An executive's remuneration added back?
A confidential first exchange to demonstrate the reality of the work and the justification of the amount, and to defend the deduction.
Written by
Me François Ouairy, avocat associé en charge du bureau de Paris, expert en fiscalité immobilière, fiducie et fiscalité financière.
This page presents the reassessment for excessive remuneration for information purposes; each matter calls for a specific analysis. References to the French Tax Code and to the case law in force at the date of writing.