Contributed By Baker McKenzie AARPI
The French tax authorities (FTA) audit the tax returns, the documents used for the establishment of taxes, and supporting documents filed by taxpayers.
An audit may take different forms.
Off-Site Audits ("Contrôle Sur Pièces")
Off-site audits consist in carrying out a critical examination of the returns filed by the taxpayer, and aim at
Where the taxpayer is an individual, a contradictory examination of the personal tax situation (examen contradictoire de la situation fiscale personnelle) is initiated. It consists in checking the consistency between the declared income and the assets, cash flow situation and the lifestyle elements of the members of the tax household (Article L. 12 of the French Book of Tax Procedures (Livre des procedures fiscales), the FBTP).
Where the taxpayer is a company, an accounting audit (vérification de comptabilité) is initiated. An accounting audit involves, beyond a simple examination of the accounts, a comparison of the extra-accounting information with the accounting data on which the declarations are based (Articles L. 13 and R. 13-1 of the FBTP).
Remote Simplified Tax Audit Procedure
When the FTA consider that an accounting audit is not necessary, and provided the taxpayer uses a computerised accounting system to book its accounts, the audit can also take the form of a remote simplified tax audit procedure (examen de comptabilité à distance).
Pursuant to sections L. 13 G and L. 47 AA of the FBTP, the taxpayer is required to provide to the FTA a copy of its "dematerialised accounting files" (fichier des écritures comptables, FEC). The FTA may conduct any sorting operations, and are allowed to request additional information, justifications or clarifications to characterise anomalies detected.
The FTA may follow two different routes to reassess a taxpayer’s taxable basis, either through an adversarial adjustment procedural or, under certain circumstances, through a unilateral adjustment procedure (see 3.1 Administrative Claim Phase).
According to the 2018 statistics booklet (Cahier Statistiques 2018 – Direction Générale des Finances Publiques) of the General Directorate of Public Finance (DGFIP), the taxes that give rise to the most tax controversies and the values (net values in 2018) involved are summarised below:
Tax controversy can be mitigated by being prepared in advance (ie, by having reviewed the documentation that needs to be made available to the FTA or that could be requested by the tax auditor at any time (eg, transfer pricing documentation, FEC files, documentation supporting transactions, including archives).
Also, before the audit starts, it is vital to identify the strengths and weaknesses of a case.
Several of the EU's recent measures were transposed into domestic law to combat tax avoidance.
The Finance Act for 2019 transposed the Anti-Tax Avoidance Directive (ATAD) 2016/1164/EU dated 12 July 2016 on interest limitation rules. It creates a new general mechanism for limiting net financial expenses and provides for specific rules depending on whether or not the company or tax group is thinly capitalised.
In addition, the Finance Act for 2020 transposed the Anti-Tax Avoidance (ATAD 2) 2017/952 dated on 29 May 2017 in order to prevent French-based entities from deducting expenses related to hybrid arrangements or from taxing in France an expense related to a hybrid arrangement that has been deducted abroad. These new provisions (Article 205 B, 205 C and 205 D of the French Tax Code (FTC)) are mainly applicable to fiscal years beginning from 1 January 2020.
Moreover, the general anti-abuse clause provided for by the ATAD Directive is transposed into the new Article 205 A of the FTC, which provides that "in the assessment of corporation tax, no arrangement or series of arrangements shall be taken into account which, having been put in place to obtain, as a main objective or as one of the main objectives, a tax advantage contrary to the object or purpose of the applicable tax law, is/are not authentic in the light of all the relevant facts and circumstances".
Finally, a specific anti-abuse rule with regard to the exemption of withholding tax on dividends distributed to a European parent is provided for under Article 119 ter of the FTC (resulting from the transposition of the Council Directive 2015/121 of 27 January 2015, which supplemented the Parent-Subsidiary Directive 2011/96 of 30 November 2011).
Therefore, dividends distributed as part of an arrangement which, having been set up to obtain – as a main objective or as part of one of the main objectives – a tax advantage that defeats the object or purpose of the tax regime, are excluded from the exemption from withholding tax, which is granted under certain conditions.
Some of the BEPS (Base Erosion and Profit Shifting) recommendations of the OECD were also transposed into domestic law to combat tax avoidance.
In order to implement Action 2 of the BEPS project, France adopted a provision, provided for by Article 212, paragraph 1 (b), which aims at neutralising the effects of hybrid mismatch arrangements by preventing the deductibility of interest paid to associated enterprises.
France also implemented the country-by-country reporting rules, following the release of the OECD/G20 BEPS Action 13 report.
A new Article 223 quinquies C was added to the FTC, and its provisions are similar to the ones from the Directive 2016/881/EU as regards mandatory automatic exchange of information in the field of taxation.
Further to Action 5 of the BEPS project, the French taxation of revenues derived from intellectual property (IP) assets or a "patent box" regime was considered harmful since it was not in line with the so-called "Nexus" approach. Therefore, the 2019 French Finance Act reformed this patent box regime, introducing substantial changes to the scope and conditions of its application, now codified in Article 238 of the FTC.
Furthermore, the definition of permanent establishments is currently evolving, following the final report of the OECD/G20 BEPS Action 7 on Preventing the Artificial Avoidance of Permanent Establishment Status and depending on the willingness of states to implement this evolution into their double tax treaties. On 7 June 2017, France signed the OECD Multilateral Instrument (MLI) and notably opted to include Article 12 of the MLI, which enshrines a new broader permanent establishment notion. The application of this broader notion in double tax treaties (DTT), however, depends on the choices made by other signatories.
In principle, once tax collection notices have been issued (see 3.1 Administrative Claim Phase), the taxpayer has to pay the tax due before lodging a claim before the FTA (administrative phase). In principle, the taxpayer must first pay the reassessed tax and later be reimbursed should a court invalidate the reassessments.
After having challenged the proposed tax reassessments and during the pre-litigation phase of the procedure, the taxpayer may claim the benefit of the deferral of payment of the tax due until a decision is granted by the court, provided sufficient financial guarantees are given (Article L. 277 of the FBTP).
The FTA therefore send the taxpayer a request to enter into or provide guarantees supporting the deferral of payment that was claimed. The provision of guarantees is required for any payment deferral. In the absence of an answer by the taxpayer, the payment deferral could be rejected and the taxpayer would have to pay immediately. The FTA are obliged to examine all the offered guarantees.
Should they consider the proposed guarantees insufficient, the authorities can reject them in a decision that is supported by adequate grounds sent to the taxpayer. This decision can be challenged, however, before the tax judge within a period of 15 days as of the receipt of the letter from the Treasury Accountant (Comptable du Trésor Public), informing the taxpayer of the refusal of the proposed guarantees. The tax judge will only take a position on the guarantees proposed by the taxpayer and will not hand down a decision on the merits of the reassessments.
If the taxpayer obtains the payment deferral, and if the lower tax court rejects its claim, the taxpayer will have to pay the reassessed tax, late payment fees and penalties, as well as additional late payment interest. Conversely, the taxpayer will be entitled to a refund of the guarantee fees. If the taxpayer decides to pay immediately after the receipt of the tax collection notice, and if the lower tax court upholds the right to its claims, it will be entitled to a refund of the sums paid, plus late payment interest.
Tax penalties apply if the taxpayer fails to declare and/or pay the tax in due time. The sanctions for failing to file declarations correctly, pay taxes or fulfil other tax obligations can be divided into two broad categories:
In principle, late payment interest of 0.2% per month is due on all late payment of taxes (Article 1727 of the FTC) caused by the late filing of tax returns and other assessment documents, under-payments (errors or omissions) and simple late payments. This late payment interest is not capped and its starting point depends on the taxes adjusted.
The late payment interest may be reduced in certain circumstances, notably depending on the behaviour of the taxpayer.
The FTC also provides for a specific penalty for the failure to file declarations and documents or the failure to file these on time (10% when the late declaration is filed by the taxpayer prior to any notice of the French tax authorities or within 30 days after an initial official notice (mise en demeure); 40% if the declaration or information document is not sent to the FTA within 30 days after the official notice; or 80% in the event of concealed activity).
Other tax penalties are applicable – eg, in the case of a deliberate breach (amounting to 40%), abuse of law (amounting either to 40 or 80%), fraudulent behaviour (amounting to 80%) or refusal to co-operate during a tax audit (amounting to 100%).
The general offence of tax fraud is broadly defined by Article 1741 of the FTC and is punishable, regardless of the applicable tax penalties, by five years' imprisonment and a fine of EUR500,000, which may be increased to an amount equal to twice the proceeds of the offence (note that the level of penalties can be increased up to five times the above-mentioned amount for legal entities, which could represent EUR 2.5 million or ten times the proceeds of the offence).
The penalties are increased where the acts were committed by an organised group or under specified circumstances.
The level of these penalties may be lowered by the judge.
The 23 March 2020 Emergency Act declared COVID-19 a state of health emergency applicable over the next two months following enforcement and was then extended to 10 July 2020 by the 11 May 2020 Act.
The 23 March 2020 Emergency Act also authorised the government to legislate by means of orders to take measures in many fields to deal with and limit the impacts of the COVID-19 outbreak.
More precisely, with regard to tax controversy matters, Order No 2020-306 applies to terms and measures that expired or should have expired between 12 March 2020 and one month from the date of termination of the state of health emergency (the "legally protected period"). Tax procedures, tax audits, tax recovery and tax reassessment notices are impacted by this Order. For instance, this Order provides for a suspension of the statute of limitations of the French tax authorities (for a period whose duration is equal to the legally protected period) for tax reassessments which were not time-barred on 12 March 2020 and were to be so by 31 December 2020.
COVID-19 may also have a practical impact on the way tax audits will happen in the future (with a potential development of off-site procedures) as well as on discussions with the French tax authorities (which may focus on companies which would be considered as having been less negatively impacted by COVID-19) and future tax controversies due to an anticipated need for additional resources.
In France, enterprises are audited on a discretionary basis and, consequently, some entities are more likely than others to be subject to tax audits.
For instance, large companies are audited about once every three years. The FTA may use databases to identify and follow companies that need to be audited regularly or apply a method using different ratios, taking into account the turnover declared, inventories, purchases, labour costs, purchase of assets, debts, income and booked reserves, and depreciation allowances.
Furthermore, the local tax authorities (Service des Impôts) monitor the consistency of tax returns and look for errors in order to propose tax audits. Specific tax departments such as the Direction Nationale des Enquêtes Fiscales process information (press, derogatory procedures, etc) per activity and sector.
The General Directorate of Public Finance has a tax policy that is dependent on strategic sectors and also looks for specific frauds (eg, intra-community VAT, new business and R&D tax credit).
There is no specific time limit within which the tax audit must be initiated, even though in practice, tax authorities are limited by the statute of limitations.
For small and medium-sized businesses, the tax inspector is not authorised to stay for more than three months in the premises of companies (Article L. 52 of the FBTP).
For individuals, the audit may not exceed one year as of the notice of audit, extended to two years if an undeclared activity is discovered (Article L. 12 of the FBTP).
In all other cases, the FTA do not have any time limit within which the tax audit must be completed.
In this respect, the FTA can only exercise their authority to audit and reassess within three calendar years following the year during which the taxable event occurred (Article L. 169 of the FBTP).
There are several exceptions to this general rule (eg, the statute of limitations is extended to ten years in the event of a concealed activity or when French-controlled foreign companies rules are applicable).
In addition, the FTA may audit the origin of tax losses generated during a statute-barred year, which are carried over to a year that is still open to tax audit, and reassess them.
The statute of limitations is interrupted by either a reassessment notice or by any other declarations or notifications of minutes, by any act involving recognition of the parties liable for payment (payment of a deposit, request for an additional time limit, request for a penalties discount, precise accounting records, etc) or by any other commonplace law interrupting acts (legal proceedings, enforcement actions).
Where the taxpayer is an individual, the tax audit takes place, in principle, within the FTA’s premises.
Where the taxpayer is an entity, the tax audit generally takes the form of an on-site tax audit (verification de comptabilité), or, under certain circumstances takes the form of a remote simplified tax audit procedure (examen de comptabilité à distance).
In the case of an on-site tax audit procedure, the tax audit takes place, in principle, within the premises of the company.
To obtain more information than is provided by the taxpayer, the FTA also have, notably:
Key areas and matters for tax auditors’ special attention are transfer pricing and questions of permanent establishment.
Transfer pricing issues are sensitive issues and need specific attention. The nature, content and form of the documentation and information to be supplied should be carefully reviewed, in particular the transfer pricing documentation, which should be of a sufficiently high standard and well prepared.
There have been numerous permanent establishment assessments made by the FTA over the last few years. The position of the FTA has recently been rejected in the Google case and the Conversant International Ltd case.
The FTA also pay special attention on matters such as business restructurings, VAT, withholding tax, employee benefits and R&D tax credits.
Due to the globalisation and development of international business exchanges, the FTA use more and more exchanges of information within the course of tax audits. The FTA rely either on domestic law which is enriched by the transposition of EU directives as part of the BEPS project, or tax treaties which provide for a right to exchange information between tax authorities.
As part of the BEPS project, Article 223 quinquies C of the FTC introduced country-by-country declaration of economic, accounting and tax results that must be remotely declared by certain companies in order to combat tax optimisation and tax evasion.
Moreover, Article L. 114 of the FBTP allows the FTA to communicate any information concerning direct or indirect taxes upon the request of another member state, as long the FTA have reciprocal treatment in the other EU member state.
Furthermore, several EU directives have strengthened the co-operation between EU member states and extended the scope of the exchange of information in many fields.
Besides, in DTT provisions, the contracting states generally agree to exchange information within the scope of the tax treaty. The OECD Model Tax Convention relating to the exchange of information and its last commentaries notably allows the FTA to ask for information on a group of taxpayers, without naming them individually, as long as the request is not a "fishing expedition".
These kinds of procedures must ensure that the rights and guarantees of the taxpayer are respected. DTTs usually limit the scope of application of the exchange of information.
The mutual assistance between the FTA and foreign tax authorities has increased over the past years, with more frequent use of exchanges of information. Similar and simultaneous reassessments have been observed in several subsidiaries of the same groups established in different jurisdictions.
Article L. 45 of the FBTP provides that the FTA can agree with another member state to initiate simultaneous audits. Information gathered during the course of these audits will be exchanged between the different tax authorities.
Article L. 45 of the FBTP also provides for the possibility of initiating joint tax audits even if this remains rare in France.
It is advisable to engage in continual discussions with the tax auditor to be able to understand their potential concerns since the procedure must be adversarial.
During the closing meeting of the audit, it is important to clearly understand the intent of the tax auditor and the items he or she intends to reassess. This is the last step before the receipt of a tax reassessment notice (proposition de rectification).
Following the receipt of the tax reassessment notice, it is generally recommended to develop all the arguments that may be relevant in the taxpayer's response.
During the entire procedure, the main issue is to determine whether the taxpayer should try to enter into a settlement agreement with the FTA or move forward to litigation. This will mainly depend on the arguments of the FTA and the nature of the reassessment, but it is recommended to challenge all the reassessments and determine the chance of success of the taxpayer’s positions.
In the event of disagreement, the taxpayer has the right to appeal to the Departmental Interlocutor (Interlocuteur Départemental), who is one of the heads of the FTA’s service in charge of tax audits.
Besides, in certain circumstances, the dispute may be submitted for an opinion to the Departmental Committee on direct taxes and turnover taxes at the request of one or other of the parties.
The administrative phase claim begins with the implementation of either the adversarial adjustment procedure or the unilateral reassessment procedure. At the end of these procedures, a tax collection notice is sent to the taxpayer, which allows it to file a tax claim before the FTA to request the withdrawal of the reassessments.
If the FTA determine, after an audit, that the taxpayer’s tax return contains a deficiency, omission or concealment, or is inaccurate upon comparison with the latter’s taxable income or transactions, they may initiate a contradictory reassessment procedure (procédure de rectification contradictoire) by sending a tax reassessment notice to the taxpayer (Article L. 55 of the FBTP). A tax reassessment notice must notably set forth the amount of the proposed reassessment, the reasons therefore, and the tax consequences of such a reassessment (Articles L. 57 and L. 48 of the FBTP).
Within 30 days from the date of receipt of the tax reassessment notice (which can be extended to 60 days at the taxpayer's request), the taxpayer must either accept the proposed reassessment or submit a response challenging the reassessment (observations du contribuable) (Article R. 57-1 of the FBTP).
If the taxpayer accepts this reassessment, or fails to respond, it is not barred from challenging the reassessment but the burden of proof will shift from the FTA to the taxpayer. If the taxpayer refuses the reassessment and files a response, the FTA may thereupon either drop, confirm or modify the proposed reassessment (Article L. 57 of the FBTP) by way of an answer to the taxpayer’s comments (réponse aux observations du contribuable).
In this respect, the FTA have an obligation to respond to the observations of the taxpayer within 60 days (concerning industrial and commercial companies whose turnover does not exceed EUR1,526,000, and companies with a non-commercial activity whose turnover does not exceed EUR460,000) (Article L. 57 A of the FBTP). Otherwise, the FTA will be deemed to have accepted the observations of the taxpayer. After this notice has been sent by the FTA, the taxpayer may resort to administrative appeals.
Moreover, both the FTA and the taxpayer have the right, under certain conditions, to submit the matter to the Commission for direct taxes and turnover taxes (Commission des impôts directs et des taxes sur le chiffre d’affaires) or the Departmental Conciliation Committee (Commission Départementale de conciliation) within 30 days (Article L. 59 of the FBTP). Such Commission will issue a non-binding opinion on questions of fact, not of law.
After the last letter of the FTA, and in the absence of recourse to the Commission, the FTA are entitled to issue a tax collection notice requiring the taxpayer to pay the tax due (avis de mise en recouvrement).
Besides, in certain instances, the FTA have the authority to reassess the taxpayer’s income (Article L. 65 of the FBTP) unilaterally (eg, where the taxpayer failed to file a tax return in due time, and fails to do so within 30 days of its receipt of a notice sent to that effect by the FTA (Articles L. 67 and L. 68 of the FBTP)).
The time period within which the taxpayer can file a claim would generally expire on 31 December of the second year following the year of the receipt of the tax collection notice or the payment of the tax.
The FTA will review the claim and have the right to change the stated legal basis for the reassessment, as well as reduce or cancel the reassessment.
It is only upon a response by the FTA to such a claim that the case can be brought to court. A lack of response from the FTA after a six-month period allows the action to be initiated with the court.
Judicial tax litigation is initiated by the means of an introductory brief (requête introductive d'instance) before the administrative court or a subpoena to initiate proceedings (assignation) before the civil court.
The competent jurisdiction is different depending on the nature of the tax in dispute and will depend geographically on the jurisdiction in which the service of the FTA in charge of the collection of the tax is located.
Appeals against administrative tax decisions will be heard either before the lower civil courts (for stamp duties, indirect contributions and taxes on real estate wealth tax) or before the lower administrative courts (for direct taxes and turnover taxes).
Before lower courts, the parties' claims and arguments are set out in written conclusions. With regard to pleadings, they must only refer to the claims already raised in written conclusions.
Before the tax court, the question of burden of proof depends on the reassessment procedure.
In principle, the FTA bear the burden of proof when they intend to reassess the tax base of a taxpayer; for some procedures, such as the ex officio procedure, the burden may be passed to the taxpayer.
Before the criminal court, the burden of proof lies in all cases with the prosecution – ie, the Public Prosecutor's office, to which the tax authorities may be added as a civil party.
The strategic options to consider during tax litigation depend on the factual and legal background of the case and should be assessed on a case-by-case basis.
In addition to domestic case law, French courts take into consideration case law from the European Court of Justice and the European Court of Human Rights.
In addition, the FTA’s doctrines (official published guidelines and individual decisions) are enforceable in cases of tax reassessment. Article L. 80 A of the FBTP prohibits tax authorities from raising taxes that would be in contradiction with the administrative doctrine in force at the time they were applied, either by the FTA or by the taxpayer.
Finally, the OECD Commentary on the Model Convention could be taken into consideration by French courts to interpret the provisions of tax treaties provided that they were published before the signing of the relevant tax treaties (Supreme Administrative Court 30 December 2003 No 233894, SA Andritz).
Judgments of lower courts may be appealed to the Court of Appeal (Cour d'appel) within whose jurisdiction the lower court is located.
The deadline to file such an appeal depends on the appealing party (the taxpayer or FTA) and whether the first instance decision was rendered by an administrative or a civil lower court.
Judgments of appellate courts can be appealed before the supreme courts – the Supreme Administrative Court (Conseil d’Etat) or the Supreme Civil Court (Cour de Cassation).
Supreme courts are not a third level of jurisdiction (as they do not rule on the merits of a case). They are required to decide if the law has been correctly applied.
The parties' claims and arguments are set out in written conclusions.
Depending on the competent jurisdiction, deadlines to file written conclusions may be binding.
The composition of the court depends on the nature of the litigation and the complexity of the case.
Alternative dispute resolution (ADR) mechanisms such as mutual agreement procedures (MAP) may be used to resolve situations of double taxation that are caused by transfer pricing or permanent establishment reassessments.
France has concluded more than 120 bilateral tax treaties containing a MAP article. For transfer pricing matters resulting in double taxation, a MAP can also be initiated under the European arbitration convention. The opening of both procedures can be requested in parallel. The French competent authorities may refuse to open a MAP under certain circumstances.
Depending on the applicable bilateral tax treaty, the deadline to request the opening of a MAP ranges from three months to three years from the measure that leads to double taxation. In some bilateral tax treaties, no deadline is specified. In practice, it is generally recommended that the opening of a MAP be requested soon after the administrative appeals have been exhausted.
The opening of a MAP does not suspend the issuance of tax collection notices.
The MAP can end in an agreement of the competent authorities on the following:
The solution retained can be a mix of these two possibilities, if only parts of the reassessments are maintained.
The taxpayer can accept (and then will have to waive any subsequent claim) or refuse the solution.
Under bilateral MAP procedures, the competent authorities are not obliged to reach an agreement.
A few tax treaties concluded by France include an arbitration clause, consistent with Article 25 (5) of the OECD Model Tax Convention (eg, the 2009 amendment to the tax convention concluded between France and the USA).
In the context of Action 14 of BEPS, countries have notably committed to establish an effective monitoring mechanism to ensure the minimum standard is met and to make further progress to rapidly resolve disputes.
Thus, Articles 16 to 26 of the OECD MLI aim at implementing the minimum standards enshrined in Action 14 of BEPS and a number of complementary best practices. France opted in for most of these provisions when submitting its instrument of ratification on 27 September 2018. The MLI entered into force on 1 January 2019.
Under the European arbitration convention, the competent authorities have, in theory, a two-year deadline to reach an agreement in a MAP. Otherwise, the competent authorities should open an arbitration phase, subject to the taxpayer’s agreement.
The arbitration committee should give an opinion on the case within six months of the date on which it was appointed. This opinion must be based on the arm’s-length principle, and it is not binding on the competent authorities, but if they do not agree on another solution within another six-month period, the arbitration committee’s opinion will prevail.
In practice, very few cases have reached the arbitration phase of the European arbitration convention, despite the fact that a significant number of MAP cases have not been resolved within the two-year time frame.
On 10 October 2017, the Council of the European Union introduced a more co-ordinated EU approach to taxation dispute resolution, to ensure that businesses and citizens can resolve disputes related to the interpretation of tax treaties or double taxation problems more swiftly and effectively.
As regards MAP and arbitration procedures, please refer to 6.1 Mechanisms for Tax-Related ADR in this Jurisdiction.
According to Article L. 247 of the FBTP, tax settlements are only possible in regard to tax penalties.
However, another procedure – a global settlement (règlement d’ensemble) – may also be made as part of a tax audit of a company, enabling the company to reach an agreement with the tax authorities on the amount of taxes and penalties due.
Please refer to 6.1 Mechanisms for Tax-Related ADR in this Jurisdiction and 6.2 Settlement of Tax Disputes by Means of ADR.
There are different kinds of rulings under French law:
In both cases, the ruling shall clearly outline the technical analysis of the applicant and a precise, complete and sincere presentation of the factual situation (ie, complete disclosure of the facts).
It should be noted that:
The information disclosed through a ruling application should remain confidential.
Tax settlements cover all kinds of situations (ie, all taxes and penalties, except where a settlement would be based on Article L. 247 of the FBTP, which only covers the amount of penalties) and can be reached at any time of the procedure (including where a litigation is ongoing) with no specific deadline applicable, even though they are generally reached before the issuance of the tax collection notice. In France, tax settlements are generally definitive and not subject to appeal or any other recourse.
MAPs only cover economic double taxation and specific deadlines are applicable (see 6.1 Mechanisms for Tax-Related ADR in this Jurisdiction). In the case of arbitration, the competent authorities have six months either to agree on an alternative solution or accept the solution of the arbitration panel.
ADR mechanisms can be used to settle disputes over transfer pricing cases, since they could lead to double taxation (in this respect, see 6.1 Mechanisms for Tax-Related ADR in this Jurisdiction). Transfer pricing cases or cases where taxes are determined by indirect methods may also be settled by a global settlement.
When characterised presumptions of tax fraud exist, the Public Prosecutor is generally not allowed to prosecute the taxpayers on his or her own initiative.
The Public Prosecutor is allowed to prosecute the offence of tax fraud in cases where the FTA lodge a criminal complaint.
In addition to the possibility of the FTA filing complaints for tax fraud, Law No 2018-898 on the fight against fraud, dated 23 October 2018, provides that the French tax authorities are compelled to report facts to the Public Prosecutor where these facts lead to:
Once the facts have been reported, the Public Prosecutor is entitled to prosecute for the offence of tax fraud.
In addition, if the FTA has filed a criminal complaint for tax fraud regarding a taxpayer, the Public Prosecutor can extend criminal charges to other taxes and other years without the need for a further criminal complaint or reporting for those years from the FTA.
Once the complaint has been filed or the facts have been reported, judicial investigation can be, under the judicial authorities’ control, conducted by tax agents benefiting from judicial powers.
It should be noted that the offence of money laundering of tax fraud can be prosecuted by the Public Prosecutor on his or her own initiative.
Administrative courts are not bound by the decisions of judicial courts in criminal matters, and vice versa, by virtue of the principle of independence of tax and criminal proceedings. As a consequence, judicial courts are not required to stay the proceedings and await the decision of administrative courts, nor are they bound by the latter’s decisions, which means that they can find taxpayers guilty for tax fraud even if the Supreme Administrative Court has recognised that the reassessments which justified the criminal proceedings for tax fraud were not grounded, as long as the criminal judge characterises the same facts in a different manner.
However, there are limits to this principle of procedural independence.
Firstly, the administrative judge is bound by the material findings of facts by the criminal judge, and by their legal characterisation for criminal law purposes, upon two conditions
First, that these findings of facts are made in a final judgment on the merits (ie, a judgment that has the force of res judicata). Conversely, the administrative judge is not bound by a decision to dismiss proceedings (ordonnance de non-lieu) or by a referral order (ordonnance de renvoi) by the investigating judge (juge d’instruction).
Second, that these findings of facts constitute the necessary grounds of the decision of the criminal judge. Conversely, the administrative judge is not bound by the findings of facts that do not motivate the decision of the criminal judge (Supreme Administrative Court 14 Dec 1984, No 37200). Therefore, where a decision of acquittal is rendered by a criminal court, the administrative court is required, before making its own assessment regarding the materiality and characterisation of the facts for tax law purposes, to determine whether or not this acquittal was based on findings of fact which are binding on it.
If these conditions are met, the facts found by the criminal judge are deemed materially established, and the taxpayer is not entitled to challenge their accuracy before the administrative judge.
Secondly, and conversely, the criminal judge may, without disregarding his or her jurisdiction, and without breaching the above-mentioned principle of procedural independency, justify his or her decision to acquit in the view, among other things, of the decisions handed down by administrative courts to discharge the taxpayer.
In several decisions, the Constitutional Court ruled that the cumulative application of tax and criminal penalties was in compliance with Article 8 of the Declaration of the Rights of Man and of the Citizen, but has expressed interpretative reservations according to which it is applicable if certain conditions are met.
The general offence of tax fraud is broadly defined by Article 1741 of the FTC.
Theoretically, all tax adjustments may lead to criminal prosecution.
Except for the rules under which the tax authorities are compelled to report facts to the Public Prosecutor, the prosecution of the offence of tax fraud is at the sole discretion of the FTA.
In 2019, 1,678 tax cases evolved into criminal cases: 713 criminal complaints have been filed by the French tax authorities and 965 cases have been reported to the Public Prosecutor based on the rules deriving from the law on the fight against fraud dated 23 October 2018.
Once a complaint has been filed by the FTA (or facts have been reported to the Public Prosecutor by the FTA), judicial investigations are generally launched by the police.
Several investigative acts (dawn raids, production orders, witness interviews, free interviews, placement under police custody, geo-tracking, telephone-tapping, surveillance and undercover operations) may be performed by police officers or directly by the Public Prosecutor in preliminary investigations.
As regards the duration of preliminary investigations, there is no legal timeframe within which investigations shall be concluded.
Once the preliminary investigation is considered by the Public Prosecutor to be terminated, the latter gets to choose which path the criminal case is going to follow. Several options may be contemplated, as the Public Prosecutor may decide
Under French criminal law, the Public Prosecutor is granted significant leeway when deciding whether to prosecute a criminal offence or not. If he or she considers that the preliminary investigation is sufficient, he or she may decide to seize the criminal court of that offence (the tax court being not competent to hear tax criminal cases).
If the Public Prosecutor considers that the preliminary investigation did not result in the revelation of all the circumstances surrounding the commission of a criminal offence, thus preventing its immediate criminal prosecution, he or she may decide to appoint an investigating judge tasked with further investigating that criminal offence during a so-called judicial investigation. At the end of the judicial investigation, the investigating judge may consider either that there are insufficient charges to seize the court, and shall hence issue a dismissal order, or that there are sufficient grounds for a person to stand trial, in which case it shall issue a specific committal order laying out charges with a view to seizing the criminal court having jurisdiction to try the offence.
Once the criminal court is seized, the investigating judge withdraws from the proceedings and does not participate in the final determination on the criminal offence.
There is no rule under which a taxpayer can benefit from reductions of fines applicable to the corresponding tax offence where upfront payment of the additional tax assessment is made.
The criminal judge may, however, take this element into account to reduce the amount of the fine provided by the criminal law.
Paying the tax assessed, plus interest and penalties, cannot prevent or stop a criminal tax trial.
It is possible to prevent or stop a criminal tax trial by concluding a criminal settlement with the Public Prosecutor or the investigating judge.
Two criminal settlement proceedings could potentially be envisaged under French law, both applicable for the offences of tax fraud and the money laundering of tax fraud.
A settlement close to plea bargaining agreements which is referred as "comparution sur reconnaissance préalable de culpabilité" (CRPC). The CRPC requires that the defendant pleads guilty to the charges and applies to both individuals and companies but only for certain offences. Once the Public Prosecutor and the defendant reach an agreement, the defendant is brought before the president of the first instance tribunal.
A settlement close to a deferred prosecution agreement (Convention Judiciaire d'intérêt Public, CJIP). The CJIP allows entities (ie, not individuals) to avoid a criminal conviction by:
Unlike with the CRPC, the defendant is not required to plead guilty to the charges. The CJIP must be approved by a judge, and if so, the prosecution office issues a press release and the approval order issued by the judge is published on the new National Anti-Corruption Agency’s website.
It is possible to appeal before the competent appellate court against a decision adopted by a court of first instance that decided on the criminal tax offence in question. The court of appeal has the ability to re-examine the entire case. The appeal has a suspensive effect.
Rules challenging transactions and operations, notably under general anti-abuse rules (GAAR) or under transfer pricing rules, could give rise to criminal tax cases, even though until now the vast majority of the criminal tax cases have been related to VAT fraud.
In the event that a double taxation situation occurs due to a tax adjustment performed by the FTA, it is common to use both domestic litigation to challenge the position of the FTA and the available mechanism under the double tax treaty (eg, the mutual agreement procedure or an arbitration).
In France, there are general anti-abuse rules (GAAR) and specific anti-abuse rules (SAAR) applying to cross-border situations covered by bilateral tax treaties.
With regard to GAAR, several articles such as Article L. 64 of the FBTP, Article L. 64 A of the FBTP and Article 205 A of the FTC provide for general anti-abuse rules, which are notably applicable in cross-border situations.
Article L. 64 of the FBTP provides for an abuse of law (abus de droit) procedure that allows the FTA to dismiss, as not enforceable against it, the acts constituting an abuse of law.
In addition, acts committed or carried out as from 1 January 2020 may henceforth be excluded by tax authorities in the case of an abuse of law, on the grounds that their main purpose is tax avoidance (L. 64 A of the FBTP).
In terms of corporate income tax, a general anti-abuse clause allows the FTA to ignore an arrangement or a series of arrangements, which – having been put into place for the central purpose of (or if one of the central purposes is) obtaining a tax advantage that defeats the object or purpose of the applicable tax law – are not genuine, having regard to all relevant facts and circumstances (Article 205 A of the FTC).
Various specific anti-abuse rules are also provided for under French legislation and specifically cover abuses of law allowed by cross-border situations.
The transfer pricing method used by a company could be challenged by the FTA based on both domestic provisions and double tax treaty provisions.
Article 57 of the FTC allows the FTA to adjust the profits of a French enterprise in the event that the latter has indirectly transferred profits to a foreign-associated enterprise by an increase or decrease in purchase or sale prices, or by any other means. The arm’s-length principle is also set out in Article 9 of the OECD Model Tax Convention.
Multinational enterprises can request unilateral or bilateral advance pricing agreements (APAs) from the FTA to reach an agreement on the determination of a transfer pricing method over a given period of time for future related-party transactions, and so to avoid future litigation in transfer pricing matters.
The FTA has expressed a preference for bilateral APAs.
Unilateral APAs are especially available in the following cases:
No unilateral APA is granted for transactions with enterprises situated in countries that do not have a treaty with France and have a privileged tax regime (as defined in Article 238 A of the FTC).
In an APA, the FTA agrees on the method, not on the price itself. An APA can be requested for all the transactions between a French enterprise and its associated foreign enterprise, or dealings between a permanent establishment and the rest of the enterprise to which it belongs. Alternatively, it can be requested – subject to the FTA agreeing that such a restricted scope is acceptable – for a segment of the enterprise’s activities only, a type of transaction, a function or a product.
A simplified APA procedure exists for research and development centres.
The key areas and matters for tax auditors’ special attention are transfer pricing, withholding tax and permanent establishment questions. These questions therefore generate the most litigation on cross-border situations.
No costs are required to litigate at the administrative level.
For the lower court, the taxpayer is not obliged to appoint an attorney before an administrative court and can act on his or her own behalf. Conversely, since the entry into force of the decree No 2019-1333 dated 11 December 2019, the taxpayer is now obliged to appoint an attorney before a civil court and cannot act on his or her own behalf.
Before the Court of Appeal, the principle is of the application of the procedure with mandatory representation by an attorney for proceedings in tax matters.
The declaration of appeal before the Supreme Court must be performed by a special attorney at the Supreme Court.
Trial costs can be divided into two categories, ordinary expenses and "irrecoverable" costs (frais irrépétibles).
With regard to ordinary expenses: when the claimant is successful, in whole or in part, the costs of service are refunded to him or her.
With regard to irrecoverable costs, in all proceedings, the judge shall order the party liable to pay the above-mentioned expenses or, failing that, the losing party to pay the other party the amount he or she determines, for the costs incurred and not included in the ordinary expenses (eg, lawyers' fees).
In tax matters, taxpayers who obtain a favourable judgment from a lower court may be reimbursed for the costs of guarantees provided in order to benefit from the payment deferral or may obtain late payment interest in cases where they paid the tax adjustments instead of requesting the benefit of the payment deferral. On the other hand, taxpayers who obtain a payment deferral further to the filing of a tax claim, must pay late interest to the state if the court issues an unfavourable decision against them or if they withdraw from the dispute.
No indemnities are provided for within French legislation if the court decides that the initial additional tax assessment is absolutely void and null.
However, it is possible in certain circumstances to bring an action for damages against the FTA in order to obtain indemnities.
There are no court fees applicable if a taxpayer opts to use any of the ADR mechanisms.
According to the 2018 statistics booklet (Cahier Statistiques 2018 – DGFIP) of the General Directorate of Public Finance, the number of pending tax court cases in 2018 are as follows.
For the value of net taxes recovered by the FTA relating to different taxes, please see 1.2 Causes of Tax Controversies.
According to the 2018 statistics booklet (Cahier Statistiques 2018 – DGFIP) of the General Directorate of Public Finance, statistics with regard to the number of terminated tax claims relating to different taxes are as listed below:
Statistics regarding the party (tax authorities or taxpayers) that succeeds in litigation are not published in France.
As previously mentioned, in 2.6 Strategic Points for Consideration During Tax Audits and 4.5 Strategic Options in Judicial Tax Litigation, the legal and factual analysis of the circumstances of the case are crucial to determine the strategy to be followed in a tax controversy and thus depend on a case-by-case analysis.