The French tax authorities (FTA) audit the tax returns as well as the documents used for the establishment of taxes, along with supporting documents filed by taxpayers. For this purpose, they may ask taxpayers for any information, justifications or clarifications relating to the returns and documents filed.
An audit may take the form of an off-site audit, a tax audit and/or a remote simplified tax audit procedure.
Off-site Audits ("Contrôle Sur Pièces")
Off-site audits consist in carrying out a critical examination of the returns filed by the taxpayer. The purpose of an off-site audit is: (i) to check that all taxpayers have filed their returns; (ii) to correct errors, deficiencies, inaccuracies, omissions or concealments in the tax basis, such adjustments being made on the basis of the returns themselves and the documents in the FTA's possession; (iii) with respect to income tax, ensure that the overall income declared is consistent with the taxpayer's situation.
Where the taxpayer is an individual, a contradictory examination of the personal tax situation (“examen contradictoire de la situation fiscale personnelle” (ESFP)) is initiated. It consists in checking the consistency between, on the one hand, the declared income and, on the other hand, 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, the FBTP).
Where the taxpayer is a company, an accounting audit (“vérification de comptabilité”) is initiated. The accounting audit is a set of operations whose purpose is to examine on site the accounts of the company and to compare them with certain factual or material data in order to control the declarations made and to propose any necessary reassessments. 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”).
In the case of a remote simplified tax audit, 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 tax authorities may conduct any sorting operations, classifications and calculations needed in order to verify that the data in the FEC are consistent with the taxpayer’s tax returns or other documents. The tax authorities 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 below 3.1 Administrative Claim Phase).
According to the 2017 statistics booklet (Cahier Statistiques 2017 – Direction Générale des Finances Publiques, DGFIP) of the General Directorate of Public Finance (DGFIP), the taxes that give rise to most tax controversies and the values (net values in 2017) involved are summarised below:
Tax controversy can be mitigated by being prepared in advance whenever a tax audit can be anticipated. Such preparation consists of preparing in advance and reviewing the documentation that needs to be made available to the FTA or that could be requested by the tax auditor (eg, transfer-pricing documentation, FEC files, documentation supporting transactions).
The best method for anticipating a tax audit is to be prepared to provide the FTA at any time, with the mandatory and appropriate documentation, including archives. All mandatory documents also need to be properly filed and made available. Also, before the audit starts, it is decisive to identify the strengths and weaknesses of a case.
Upon receipt of an audit notice, an internal review of the sensitive files and topics should be initiated.
Several of the European Union's (EU) recent measures were transposed into domestic law to combat tax avoidance.
The Finance Act for 2019 transposed into French law the Anti-Tax Avoidance Directive (ATAD) 2016/1164/EU, dated 12 July 2016, on interest limitation rules, repealing several domestic rules for the limitation of the tax deductibility of interest and, more globally, deeply amending thin capitalisation rules, which are applicable in France. It creates a new general mechanism for limiting net financial expenses, which are compared with the company's or the tax group's adjusted EBITDA, determined on the basis of the pre-taxable income adjusted by such net financial expenses, net depreciation and amortisations and taxable gains and losses subject to corporate income tax at the reduced rate. The mechanism also provides for specific rules depending on whether or not the company or tax group is thin-capitalised.
Moreover, the general anti-abuse clause provided for by the ATAD Directive is transposed into the new Article 205 A of the French Tax Code (FTC), which now provides that "in the assessment of corporation tax, shall not be taken into account any arrangement or series of arrangements which, having been put in place to obtain, as a main objective or under one of the main objectives, a tax advantage contrary to the object or purpose of the applicable tax law, 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 an European parent is provided for under Article 119 ter of the FTC, which results from the transposition into domestic law of the anti-abuse clause provided for in 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 (or series of arrangements) 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 to the beneficial owner of the dividends, which has its effective place of management in a Member State of the EU and which holds, on an uninterrupted basis for two or more years, at least 25% of the capital of the subsidiary.
Some of the BEPS (Base Erosion and Profit Shifting) recommendations 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. According to this rule, the borrower must be in a position to demonstrate, upon the request of the French tax authorities, that the lender is subject, during the same financial year, to the related interest income to tax at a rate at least equal to 25% of the French Corporate Income Tax, determined under standard French corporation tax rules.
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. These 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 industrial property (IP) assets or a 'patent box' regime (Article 39 terdecies of the FTC) was considered 'harmful' since it was not in line with the so-called 'Nexus' approach. Under this approach, a preferential tax regime for the revenues derived from IP assets must link the benefits it provides to the importance of the research and development (R&D) activities directly undertaken by the enterprise benefiting from it.
Therefore, the 2019 French Finance Act reformed this patent box regime to ensure its compliance with the Nexus approach, introducing substantial changes to the scope and conditions of application of this regime.
The new regime is applicable to fiscal years beginning on or after 1 January 2019. It provides for the taxation of revenues derived from eligible IPs at a reduced rate (10%). This new regime is optional; an enterprise can opt for the benefit of this regime on a global basis or by an eligible asset or group of assets contributing to the production of a good/service or a family of goods/services. Once it has opted, the enterprise is able to withdraw its option but will then definitively lose the benefit of this regime for the asset (or group of assets) concerned.
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. 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 based on Action 7 of the BEPS report to include situations in which the dependent agent “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise”. The application of this broader notion in double tax treaties, however, depends on the choice made by other signatories. As an example, the new double tax treaty concluded on 20 March 2018 between France and Luxembourg includes this new definition.
In principle, once tax collection notices have been issued (see 3.1 Administrative Claim Phrase), 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.
However, 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 to 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 these 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 plus additional late payment interest. If the lower tax court agrees with the taxpayer’s claim, 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, then it will be entitled to a refund of the sums paid, plus late payment interest.
Tax penalties apply in the case which the taxpayer failed 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: (i) late payment interest and tax fines applied by the FTA which are subject to appeal before the administrative courts, and (ii) criminal penalties imposed by criminal courts.
As a principle, late payment interest of 0.20% per month (2.40% per year) 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, underpayments (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.
In addition to late payment interest, the FTC provides for a specific penalty for the failure to file declarations and documents or the failure to file these on time. This penalty is equal to 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”); this penalty is increased to 40% if the declaration or information document is not sent to the FTA within 30 days after the official notice. This penalty may be increased up to 80% in the event of concealed activity (Article 1728 of the FTC).
Other tax penalties are applicable – eg, in case of 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 as the fact for: "anyone [to have] fraudulently avoided or attempted to avoid the establishment or the total or partial payment of the taxes covered by this Code, by means of voluntarily failing to file its tax return within the legal-time limit period, or voluntarily concealing a portion of sums subject to tax, or making itself insolvent or preventing collection of taxes from any means; or doing anything else in a fraudulent manner”.
Whether such circumstances are met, the taxpayer "is liable to, regardless of the applicable tax penalties, five years' imprisonment and a fine of EUR500,000, the amount of which may be increased to twice the proceeds of the offence" (ten times for companies).
The penalties are increased to seven years' imprisonment and a fine of EUR3 million, the amount of which may be increased to twice the proceeds of the offence (ten times for companies), where the acts were committed in an organised group or under specified circumstances.
The amount of these penalties is a maximum which can be lowered by the judge.
In France, enterprises are audited on a discretionary basis and, consequently, some entities are more likely to be subject to tax audits.
For instance, large companies are audited about once every three years, which corresponds to the standard statute of limitations. The FTA may use databases to identify and follow companies that need to be audited regularly. Some significant event may also trigger a tax audit, such as a merger or liquidation.
The FTA could 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 (eg, cash ratio, inventories’ turnover ratio, VAT-invoiced/turnover net of tax, return of personal ratio, percentage of gross margin, and percentage of net income before tax/turnover net of tax).
The FTA could thus determine average ratios for each activity and compare the ratios of the companies with the 'standard ratios' in order to select the companies to audit (ratios higher or lower than the standard ratios, evolution of ratios for a company over a number of years). This method is not automatically applied, and the actual selection depends on many criteria.
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 such as fraud concerning intra-community VAT, new business and R&D tax credit.
A tax audit can be initiated at any time. There is no specific time limit under which the tax audit must be initiated, even though in practice, tax authorities are limited by the statute of limitations.
However, for small- and medium-sized businesses, the tax inspector is not authorised to stay for more than three months in the premises of companies having revenues under EUR789,000 (sales activity) or EUR238,000 (services activity) (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 under which the tax audit must be completed.
In respect to the statute of limitations, 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. For example, the statute of limitations is extended to ten years in the event of a concealed activity (ie, the taxpayer did not file any tax return for the concerned activity in due time – this notion of concealed activity is practically applied by the FTA in the context of audits of alleged permanent establishment of foreign companies) or when French-controlled foreign companies rules are applicable.
Besides, in case the FTA has requested information concerning the taxpayer from foreign tax authorities before the statute of limitations has expired, the standard statute of limitations period may be extended until the end of the year following that during which the FTA received a response to their request and, in any event, at the latest until the end of the third year following the one for which the initial statute of limitations period expired.
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.
Some events, when they occur before the statute of limitations expire have the effect of interrupting the limitation period and giving the administration a new period under which to collect the omitted tax rights. Tax audit does not constitute one of these events.
The statute of limitation 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 of penalties discount, precise accounting records, etc) or by any other common 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, when the FTA consider that such on-site tax 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").
In the case of an on-site tax audit procedure, the tax audit takes place, in principle, within the premises of the company. Tax audit meetings are generally held at the taxpayer’s residence or place of business.
Such audits are based either on printed documents or data made available electronically. Where accounting is computer-based, the FTA can also audit the IT accounting system.
To obtain more information than is provided by the taxpayer, the FTA also have, notably:
The key areas and matters for tax auditors’ special attention are transfer pricing and permanent establishment questions.
Transfer pricing issues are sensitive issues and need specific attention. The nature, content and form of 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 in judgments dated 12 July 2017 and in the Conversant International Ltd case in a judgment dated 1 March 2018.
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 may rely on two sets of rules to request information from a foreign tax authority: either 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 a 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. This article corresponds to the transposition into national law of the OECD recommendation on country-by-country reporting, provided for in the OECD's BEPS and also included in the DAC4 directive at European Union level (directive 2011/16/EU amended by directive 2016/881/EU dated 25 May 2016).
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 – for instance, EU directives relating to anti-money laundering (2016/2258/EU), the disclosure of cross-border arrangements for taxpayers and intermediaries (2018/822/EU) or to the automatic exchange of tax rulings (2015/2376/EU).
Besides, in double tax treaty (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, however, that the rights and guarantees of the taxpayer are respected. DTTs usually limit the scope of application of the exchange of information.
On the other hand, 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 involving:
In this context, refusal to co-operate is treated as a refusal to co-operate with the FTA, which could imply the application of penalties (100%) of the tax reassessments.
It shall be noted that, to date, joint audits remain 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, be these factual or legal, as soon as possible so that at the earlier stage of the procedure all of the elements needed successfully to defend against the audit are brought forward to convince the tax auditor. Still, some procedural arguments may be developed at a later stage, especially when the FTA is no longer able to regularise the procedural errors made.
During the entire procedure, the remaining 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. It is recommended, however, first 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 auditor's superior; if the disagreement persists, the taxpayer then 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. Such a claim is mandatory before appealing against an assessment before a court.
In respect to the adversarial adjustment procedure, 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 set forth, inter alia, the amount of the proposed reassessment and the reasons therefore, as well as 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, 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). The taxpayer is entitled to request that the time period granted to provide a response be extended to 60 days; this request must be made within 30 days of the receipt of the tax reassessment notice.
If the taxpayer accepts such a reassessment or fails to respond, it is not barred from challenging the reassessment at a later point in time; such acceptance or failure to respond does, however, cause the burden of proof to shift from the FTA to the taxpayer. If the taxpayer does not accept 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). If they fail to respond within this time limit, the French tax authorities will be deemed to have accepted the observations of the taxpayer. After such 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. This unilateral reassessment procedure is not based on an audit of the amount of taxable income realised by the taxpayer, but rather on the presumed or estimated taxable income of the taxpayer. The FTA may only proceed with a unilateral reassessment in specific situations, for instance, where the taxpayer failed to file a tax return in due time (Article L. 66 of the FBTP), 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. In this respect, a lack of response from the FTA after a six-month period has the same effect as a refusal, and allows the action to be initiated with the court.
The 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 introduction of such procedure is generally dematerialised and must include the factual or legal grounds on which the request is based.
The competent jurisdiction is different depending on the nature of the tax in dispute. Disputes relating to direct taxes or turnover taxes fall within the jurisdiction of the administrative courts.
Those concerning registration and stamp duties, indirect contributions and taxes on real estate wealth tax fall within the jurisdiction of the civil courts.
The competent territorial court is the one in whose jurisdiction the service of the FTA in charge of the collection of the tax is located.
By way of derogation from the general rule set out above, disputes concerning stamp duties or land registration taxes may be brought before the civil court within whose jurisdiction these assets are 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.
After the introductory brief or the subpoena has been introduced, written pleadings are exchanged between the taxpayer and the FTA until the case is deemed ready to be decided upon by the court.
The parties are entitled to make oral submissions at the hearing. In certain procedures, oral submissions at the hearing are mandatory.
Due to the increasing number of cases submitted to the courts, these procedures could be lengthy.
Before lower courts, the procedure is mainly written. The parties' claims and arguments are set out in written conclusions. In the case of pleadings, they may only refer to the claims already raised in written conclusions. Any new argument developed at the hearing must be confirmed in writing.
There are no witnesses during the procedure before the lower courts.
Before the tax court, the question of burden of proof depends on the reassessment procedure.
Basically, and as a general 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 proof 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. It is up to them to establish the offence as well as the personal responsibility of the accused, who is always presumed innocent.
However, in practice, it is recommended that the taxpayer/tax offender produce all the elements that are likely to convince the court.
The strategic options to consider during a tax litigation depend on the factual and legal background of the case and should be assessed on a case-by-case basis. Although it remains rare in tax matters, it is possible to use experts before courts.
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 particular, concerning a claim that requires the interpretation of domestic law with regard to EU law (for instance, in cases involving a law transposing a European measure into domestic law) or the European Convention on Human Rights (since the ratification by France of protocol No 16 of the ECHR), French courts can refer issues of interpretation for a preliminary ruling to the European Court of Justice/European Court of Human Rights. Case law from other jurisdictions are neither relevant nor taken into account by French courts.
Besides, the FTA’s doctrines (official published guidelines and individual decisions) are enforceable in case of a tax reassessment. Indeed, 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 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 courts of appeal 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 after the lower courts and the courts of appeal as they do not rule on the merits of a case. Indeed, except otherwise provided by the law, when decisions are referred to the supreme courts, they are required to decide whether the law has been correctly applied by the lower courts/the courts of appeal, based on the facts.
The procedure is mainly written. The parties' claims and arguments are set out in written conclusions.
Depending on the competent jurisdiction, deadlines to file written conclusions may be binding.
Pleadings are not mandatory. If such pleadings occur, they may only refer to the claims already raised in written conclusions. Any new argument developed at the hearing must be confirmed in writing.
The composition of the court depends on the nature of the litigation and the complexity of the case.
In tax matters, courts are generally composed by three judges.
Alternative dispute resolution (ADR) mechanisms such as mutual agreement procedures (MAP) may be used to resolve situations of double taxation that are notably 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 in the following cases.
Depending on the applicable bilateral tax treaty, the deadline to request the opening of a MAP ranges from three months to three years of 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 or refuse the solution, but in the event of acceptance, the taxpayer will have to waive any subsequent claim.
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. This is the case, for example, of the 2009 amendment to the tax convention concluded between France and the USA.
In the context of Action 14 of BEPS, countries have committed to a minimum standard with respect to the resolution of treaty-related disputes. The commitment includes the establishment of an effective monitoring mechanism to ensure the minimum standard is met and that countries make further progress to rapidly resolve disputes.
In this respect, Articles 16 to 26 of the OECD MLI aim at implementing the minimum standards enshrined in Action 14 of BEPS and a number of complementing best practices in order to improve the efficiency of MAP procedures and to enable countries to include mandatory binding treaty arbitration in their tax treaties. 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. If no agreement is reached by the end of this period, the competent authorities should, in theory, open an arbitration phase, subject to the taxpayer’s agreement. In such a case, the competent authorities will set up an arbitration committee consisting of representatives from two competent authorities, independent personalities and a chairperson.
The arbitration committee should then give an opinion on the case within six months of the date when it was appointed. The opinion of the arbitration committee must be based on the arm’s-length principle. 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 adopted new rules to better resolve tax disputes. The proposal for a Council directive on double taxation dispute resolution mechanisms aims at introducing 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. In particular, a wider range of cases will be covered and Member States will now have clear deadlines to agree on a binding solution, giving citizens and companies more timely decisions.
As regards MAP and arbitration procedures, please refer to 6.1 Mechanisms for Tax-related ADR in this Jurisdiction, above.
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. This practice was instituted by a note of the FTA on 20 June 2004. These settlements are generally discussed with the team of the FTA in charge of tax audits. The possibility to reach a settlement (based on Article L. 247 of the FBTP or through a global settlement) should be assessed in a case-by-case basis.
Please refer to 6.1Mechanisms for Tax-related ADR in this Jurisdiction and 6.2 Settlement of Tax Disputes by Means of ADR, above.
There are different kinds of rulings under French law: (i) 'special rulings' exhaustively listed in the FBTP (Article L. 80 B, No 2 and seq of the FBTP) including for instance, a 'no permanent establishment ruling' under which a taxpayer asks the FTA whether it has a permanent establishment in France, and (ii) 'general rulings' (Article L. 80 B, No 1 of the FBTP) under which a taxpayer asks the FTA to draw the legal consequences of a given factual situation.
In both cases, the ruling shall clearly outline the technical analysis of the applicant as well as 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.
However, the practice of ruling is not widespread in France.
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), 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 above, 6.1Mechanisms 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. Arbitration committees are composed of one president and two (or four) independent individuals. The persons composing the arbitration committees are appointed based on their experience, recognition by their peers, and their independence and impartiality. However, their opinion is not binding on the competent authorities.
ADR mechanisms can be used to settle disputes under 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 by 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. This complaint shall be filed after the FTA has obtained the agreement of the specific committee in charge of tax fraud (Commission des infractions fiscales) in cases where the FTA consider that the taxpayer has committed the offence of tax fraud, or directly to the Public prosecutor where the FTA consider that the taxpayer has committed the offence of aggravated tax fraud.
In addition to the possibility for the FTA to file 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 (i) a tax reassessment exceeding an amount of EUR100,000 and (ii) the application (in a tax collection notice) of a) or b) or c) below:
Once the facts have been reported, the Public Prosecutor is entitled to prosecute for the offence of tax fraud.
Besides, in case the FTA 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 judiciary 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 Prosecutor in his or her own initiative.
Administrative courts are not bound by the decisions of judicial courts in criminal matters, by virtue of the principle of independency of tax and criminal proceedings. Correlatively, judicial courts are not bound by the decisions of administrative courts in tax matters. 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 in the case that the Supreme Administrative Court 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 independency.
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, as listed below.
If these two 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 cannot always ignore the administrative procedure. In this respect, 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 decisions No 2016-545, No 2016-546 QPC dated 24 June 2016, No 2016-556 QPC dated 22 July 2016 and No 2018-745 QPC dated 23 November 2018, the Constitutional Court ruled on the cumulative application of tax and criminal penalties. It indicated that this cumulative application of penalties was in compliance with the constitutional principles of legality and proportionality of criminal offences and penalties under Article 8 of the Declaration of the Rights of Man and of the Citizen, with the following interpretative reservations.
The general offence of tax fraud is broadly defined by Article 1741 of the FTC as "the fact of fraudulently avoiding or attempting to avoid the establishment or the total or partial payment of taxes by means of an entity voluntarily failing to file its tax return within the legal time limit period, or voluntarily concealing a portion of sums subject to tax, or making itself insolvent or preventing collection of taxes from any means, or doing anything else in a fraudulent manner."
Therefore, theoretically, all tax adjustments may lead to criminal prosecution.
Except the rules under which the tax authorities are compelled to report facts to the Public Prosecutor (who is then entitled to prosecute these facts for the offence of tax fraud) which derived from the law on the fight against fraud dated 23 October 2018, the prosecution of the offence of tax fraud is at the sole discretion of the FTA.
To date, the number of tax cases evolving into criminal cases is rather low. Approximately 1,000 cases are sent to the Public Prosecutor by the French tax authorities each year; according to the parliamentary works on the legal fight against fraud dated 23 October 2018, 1,000 additional cases would be reported to the Public Prosecutor according to the new procedure set by this law.
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 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 (i) not to initiate proceedings; (ii) to initiate alternative measures to criminal proceedings; or (iii) to charge and prosecute the suspect of the criminal offence.
Under French criminal law, the public prosecutor is granted significant leeway when deciding whether to prosecute a criminal offence or not. This principle is referred to as discretionary prosecution.
If the public prosecutor considers that the preliminary investigation is sufficient and provided the necessary answers to prosecute the criminal offence, it may decide to seize the criminal court of such offence (the tax court being not competent to hear tax criminal cases).
On the other hand, if the public prosecutor considers that the preliminary investigation did not result in revealing all circumstances surrounding the commission of a criminal offence, thus preventing its immediate criminal prosecution, it may decide to appoint an investigating judge tasked with further investigating into the criminal offence during a so-called judicial investigation. At the end of the judicial investigation, the investigating judge may consider either that (i) there are insufficient charges to seize court, and shall hence issue a dismissal order, or (ii) that there are sufficient grounds for a person to stand trial, it shall issue a specific committal order laying out charges with a view to seize 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 to 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, amongst other elements, in case it condemn the taxpayer to reduce the amount of criminal 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. The CRPC 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 (i) paying a fine in an amount proportionate to the gains derived from the company’s wrongdoing – which total cannot exceed 30% of the company’s annual turnover – and (ii) implementing a compliance monitorship for a period up to three years. Unlike with the CRPC, the defendant is not required to plead guilty to the charges. Nor is the defendant required expressly to admit and stipulate that the facts set forth in the request for approval of the CJIP drafted by the prosecution office is true and accurate (except if the CJIP is agreed with an investigating judge). The CJIP must be approved by a judge. If the settlement is approved, 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 court of appeal against a decision adopted by a court of first instance that decided on the criminal tax offence. 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 rather 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 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. This includes acts of a fictitious nature (abuse of rights by simulation), as well as acts which, seeking the benefit of a literal application of the texts or decisions against the objectives pursued by their authors, could not have been inspired by any reason other than that of evading or mitigating the tax charges which the person, if these acts had not been committed or carried out, would normally have borne, having regard to his or her situation or his or her actual activities (abuse of rights by fraud).
Besides, acts committed or carried out as from 1 January 2020 may henceforth be excluded by tax authorities in case of abuse of law, on the grounds of their mainly tax purpose (L. 64 A of the FBTP).
In terms of corporate income tax, a recent general anti-abuse clause allows the FTA to ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of 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. An arrangement may comprise more than one step or part (Article 205 A of the FTC).
A recent case law shows that such rules may be applied to cross-border situations since the Supreme Administrative Court provided that the procedure of abuse of law can be implemented in order to exclude an act carried out for exclusive tax purposes, by literally applying a bilateral tax treaty (CE, 25 October 2017 No 396954).
Various specific anti-abuse rules are also provided for under French legislation and specifically cover abuse of law allowed by cross-border situations.
For instance, the deduction of interest paid by a company liable to corporate tax to affiliated companies is only allowed if the debtor company demonstrates, at the request of the FTA, that the lending company is taxed, in respect of the concerned financial year, on interest received from the French company at an amount equal to at least 25% of the income tax determined under common law conditions (Article 212, I-b of the FTC).
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 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. Besides, the arm’s-length principle is set out in Article 9 of the OECD Model Tax Convention, which states that where “conditions are made or imposed between two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for these conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.”
Multinational enterprises can request unilateral or bilateral 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 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. It can alternatively be requested for a segment of the enterprise’s activities only, a type of transaction, a function or a product, subject to the FTA agreeing that such a restricted scope is acceptable.
A simplified APA procedure exists for research and development centres.
The APA procedure starts with a pre-filing meeting during which the taxpayer and the FTA discuss the potential scope of the application, the documentation requirements and overall timing. The application should in principle be presented at least six months before the first fiscal year in which the APA would become effective; however, upon express request, the FTA can agree for the APA to apply to the fiscal year during which the application has been filed. The FTA then enters into discussions with the taxpayer and the other tax authority. During the course of the application, access to all necessary documents enabling the FTA to understand the proposed transfer-pricing policy must be given to the tax authorities.
Its outcome is an agreement between two competent authorities (bilateral APA) or between the FTA and the taxpayer (unilateral APA). The taxpayer is informed of the outcome of the procedure and can agree, or not, to the proposed terms and conditions. In the case of acceptance, the agreement is concluded for three to five years, and can be renewed upon request at least six months before the expiry of the initial agreement.
The key areas and matters for tax auditors’ special attention are transfer pricing, withholding tax and permanent establishment questions. These questions therefore generate 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 and can act on his behalf. It should be noted that before a civil lower court, the subpoena to initiate proceedings must be made through a formal deed delivered by a bailiff, which involve the payment of fees.
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). The judge shall take into account the fairness or economic situation of the sentenced party. He or she may, even of his or her own motion, for reasons based on the same considerations, decide that there are no grounds for such a conviction. The amounts granted are generally significantly different from the actual costs incurred.
Besides, in tax matters, taxpayers who obtain a favourable judgment from a lower court may be reimbursed for the costs of guarantees provided to benefit from 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 2017 statistics booklet (Cahier Statistiques 2017 – DGFIP) of the General Directorate of Public Finance, the number of pending tax court cases in 2017 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 2017 statistics booklet (Cahier Statistiques 2017 – 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 is crucial to determine the strategy to be followed in a tax controversy and thus depends on a case-by-case analysis.