Excessive wage: the tax authorities must justify their decisions

The tax authorities are entitled to assess the level of remuneration of employees, particularly that of company managers. However, if they believe that the compensation pais to an officer is excessive, they may refuse the deduction of part of the wage exceeding the normal remuneration defined.

However, the administration must be able to justify its analysis of the normal nature of remuneration and rely on relevant elements.

A recent decision of the Administrative court of Nantes reminds us:

The tax administration considered that the wage of a manager was excessive based on the following criteria:

• average executive compensation for six companies in the same industry;
• the percentage of the executive’s remuneration in relation to the company’s turnover, its operating result, its tax benefit or its payroll.

The judges rejected this argument, stating in particular that:

• the manager alone assumed all the functions of administrative, financial and commercial management of the company and thus played a leading role;
• turnover had increased significantly (185%) over the period considered (suggesting that the manager had made a significant contribution);
• the average remuneration of the directors of companies in the same sector of activity was not a relevant benchmark since the companies compared were not similar in terms of number of employees, activity (the company assured the stocking of some parts unlike other companies), market positioning (the company concerned was a preferred supplier in the aeronautical sector, both civilian and military), level of operating profit in absolute terms and ratio of operating profit / sales figures.

As a result, the Nantes Administrative Court of Appeal invalidated the tax adjustment made by the tax authorities.