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This chapter is not exhaustive and is limited to broadly outline the tax consequences of the main events occurring when doing business in France. It does not constitute a tax advice or a client - attorney relationship. Materials are not suitable for tax analysis. Visitors are invited to consult a tax lawyer before taking any decision.
 Abuse of law (fraus legis)
Tax fraud
Obstruction to tax audit
Collective refusal to pay tax
Coordinated fight against international tax fraud
 Abuse of law (fraus legis)
Pursuant to section L 64 of the French tax litigation code “LPF”, the French tax authorities have the right to disregard the form of an apparently legal transaction and rather search the parties' real rather than purported intentions.
This provision may apply when the only purpose of the legal acts entered into by the parties is to obtain a lower taxation or to conceal a transfer or a realization of income. In addition an intent to conceal or act fraudulently is necessary. The legitimate desire to choose one of many available legal structures that results in the lowest tax incidence is out of the scope of the abuse of law.
The abuse of law provision applies to corporate and personal income tax, registration duties, wealth tax, VAT and since 2004 business tax "Taxe professionnelle".
A special consultative committee may be consulted by the taxpayer or by the tax authorities before applying the "abuse of law" procedure. If the Committee is not consulted, or if the tax authorities runs counter to the Committee's findings, the burden of the proof lies with the tax authorities. If the contention of the Administration is supported by the Committee, the burden of proof lies with the taxpayer.
If the contention of the Administration is upheld, a special fiscal fine, equal to 80% of the amount of the real assessment, may be imposed on top of the tax assessment based on the parties’ real intentions.
General case law fraud legis principle - Janfin case
The French Supreme Administrative Court recently ruled (Arrêt Janfin CE 27 septembre 2006 n° 260.050) that the application of the abuse of law codified in Article L 64 of the LPF (Livre des Procédure Fiscale) is limited to transactions or acts which conceal the true nature of a contract or an agreement the provisions in order to hide or disguise the realization or the transfer of profit or income, or which are exclusively driven by tax consideration (CE June 10 1981). In addition Article 64 LPF applies only to the tax basis of taxes which are restrictively listed and trigger automatically a 80% penalty.
In addition the French Supreme Court indicated that when the French tax authorities cannot apply art. 64 LPF, they have the right to challenge an abuse of law on the basis of the general case law principle of "fraud legis" which de facto target the non compliance with the spirit of the law. This general fraud legis principle would allow to challenge all acts or transactions exclusively tax driven. It may apply to taxes not listed in article 64 LPF and apply to the payment of taxes (e.g. reimbursement of excess input VAT). Regular penalty would be applicable (40% or 80%).
Based on this decision, French tax authorities may try to use systematically Fraud legis principle instead of the very compelling art. L 64 LPF rules.
In addition the general fraud legis principle would introduce a significant degree of uncertainty in the application of the law because it supposes a research of the intention of the law makers and which could no longer be based on expressed language (literal interpretation) of the rules.
French committee for the repression of abusive tax plan
In 2002, the French committee for the repression of abusive tax plan rendered 39 opinions in favor of the French tax authorities and 4 opinions in favor of taxpayers. The majority of favorable opinions is about personal income tax (16 opinions out of 19 targeting capital gain tax avoidance), registration duties (11 out of 14 trying to avoid inheritance tax by treating a donation of real property as a sale) and corporate income tax (1 opinion about a prohibited trade of deficit).
WARNING:
PEE – PEA: When shares of non listed companies are transferred to PEE or PEA (Saving plans exempt of capital gain tax), it is important to do it at market value to avoid that the French revenue considers that the use of a PEA or a PEE is an abuse of law (fraus legis) ( 80% penalty).
LUXEMBOURG – Holding 1929: Le Conseil d’Etat a jugé que l’utilisation par un résident fiscal français d’une holding 1929 dépourvue de substance constituait un abus de droit.
EU - Liberté d’établissement: Le Conseil d’Etat a en outre indiqué que l’abus de droit était compatible avec le principe de liberté d’établissement prévu par l’article 43 du traité instituant la Communauté Européenne.
EU – UK - VAT – Abuse of law
According to two decisions related to VAT in UK (Halifax case and University of Huddersfield case), ECJ judged that a taxpayer cannot benefit from abusive schemes to claim a tax advantage contrary to the goals of the 6th directive when the main purpose of the scheme is to benefit from a tax advantage. ECJ is tougher than applicable French rules which request that the scheme be exclusively tax driven to qualify it as abusive.
Tax fraud
A tax payer, who intentionally and fraudulently tried or did not pay the taxes he was normally subject to, is liable of a fine up to 37 500 euros maximum and imprisonment of 5 years maximum. Should the taxpayer carried out a business activity without issuing invoices or used intentionally falsified invoices or tried or obtained intentionally a tax refund he was not legally entitled to, the fine is up to 75 000 euros.
Fine is up to 100 000 euros maximum and imprisonment of 10 years maximum in case of repeated offense in a 5-year period following a first offence. A 80% tax penalty is added on top of fine and/or imprisonment.
Offence is always made public. All parties to the tax fraud are subject to the same fines and imprisonment. The court may decide that all parties to the offence are joint and several for the payment of the tax assessment plus interest and penalties.
Obstruction to tax audit
AJoint obstruction and/or repeated individual obstruction to tax audit are punished by a tax fine up to 7 500 euros maximum and imprisonment of 6 months maximum. Tax authorities have right to assess tax only by using information they have and to apply a tax penalty of 150% plus late interest
Collective refusal to pay tax
Coordinated fight against international tax fraud
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