Associations: when self-interested management loses the tax advantage

Running a non-profit association offers significant tax advantages: exemption from corporation tax, VAT, business rates... But these advantages have a counterpart: management must be genuinely disinterested. A ruling of the Marseille Administrative Court of Appeal reminds us that the tax authorities are vigilant.

The principle: disinterested management

To benefit from the tax regime for non-profit organisations, an association must meet several conditions. One of the most important is thedisinterested nature of its management.

In practice, this means that directors, whether de jure or de facto:

• Must not deriveany direct or indirect benefitfrom the results of the activity
• Must receive,in principle, no remunerationfor their duties as director

This rule has a few regulated exceptions (notably for large associations), but the principle remains that director roles are unpaid.

The case: a damning body of evidence

In this case, the tax authorities challenged the disinterested nature of an association's management. Several elements caught their attention during an audit:

Unjustified remuneration

The de facto director receivedsubstantial remunerationalthough he held no official mandate and no employment contract. In other words, he was paid without clear legal justification.

Benefits in kind

The same director used for personal purposes avehicle financed by the association. A benefit in kind on top of remuneration received.

Suspicious business relationships

The investigation also revealedprivileged relationshipsbetween the association and commercial companies in which the director had personal interests. These relationships suggest the association served, at least in part, the director's private interests.

The decision: recharacterisation as a profit-making organisation

Faced with this converging body of evidence, the judges confirmed the tax authorities' position:

The association's management is self-interested. It cannot therefore benefit from the tax regime for non-profit organisations.

The consequences are immediate and severe:

• Liability to corporation taxon all profits
• Liability to VATon operations carried out
• Liability to business taxes(business rates, etc.)
• Potentialtax reassessments for audited years, plus penalties

How to avoid this trap?

Formalise roles

Any director who receives remuneration must have a clear status: paid corporate mandate (within legal limits), employment contract for technical functions distinct from management, etc.

Separate interests

Directors must not have personal interests in companies with which the association works. If they do, those relationships must be transparent and at arm's length.

Regulate benefits

Any benefit in kind (vehicle, accommodation, phone...) must be justified by the functions performed and declared as such.

Document decisions

Important decisions must be taken at general meeting or board level, with minutes recording deliberations.

Key takeaways

• Disinterested management is anessential conditionof the association tax regime
• Directors must not deriveany personal benefitfrom the association
• A body of evidence (unjustified remuneration, benefits in kind, conflicts of interest) may characterise self-interested management
• Recharacterisation leads to liability forall business taxes
• Vigilance is also required overde facto directors, not only official directors

If you run an association, review these issues regularly with your accountant. A tax recharacterisation can put the entire structure at risk.