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France: Expanded anti-tax fraud procedures and CFC rules

France: Anti-tax fraud, "blacklist” and CFC rules

A new anti-fraud law (ref 2018-898, 23 October 2018) introduces changes with respect to a range of tax topics—including an updated list of non-cooperative jurisdictions and a broadening of the French controlled foreign corporation (CFC) rules. The new measures, therefore, reflect certain changes of interest to multinational groups.

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“Blacklist” of non-cooperative jurisdictions

Article 31 of the new law adds to the French blacklist of “non-cooperative states and territories”—Botswana, Brunei, Guatemala, the Marshall Islands, Nauru, Niue, and Panama—those seven territories that as of 6 November 2018 were on the EU blacklist—Bahamas, Guam, Macao, St Kitts and Nevis, Trinidad and Tobago, the U.S. Samoa Islands and the U.S. Virgin Islands.

The new French measures thereby apply to these seven territories (on the EU blacklist) certain punitive measures (including an enhanced or heightened withholding tax rate of 75% and rebuttal of application of the French participation exemption regime). 

However, certain punitive measures will not be equally applicable to these newly added seven territories, depending on the reasons why they are on the EU blacklist (e.g., offshore regimes, tax transparency, base erosion and profit shifting (BEPS) measures, etc.).

Privileged tax regime

Article 32 of the new law lowers the threshold applicable for a “privileged tax regime” referred to by certain anti-tax evasion mechanisms—such as Article 238 A of the French tax code that has the effect of reversing the burden of proof and shifting the burden to the taxpayer to demonstrate the arm’s length nature of payments made to foreign entities benefiting from a “privileged tax regime”—and the French CFC rules, codified under Article 209 B of the French tax code. 

Effective 1 January 2020, a foreign beneficiary (or foreign controlled foreign corporation or branch) will be considered as benefiting from a “privileged tax regime” if it is subject to a local tax on profit that is less than 60% of the corporate income tax that would have applied had the entity been a resident of France (the former threshold was 50%). The change to the threshold was justified by the progressive reduction of the French corporate income tax rate from 33⅓ % to 25% in 2022.

Expanded, enhanced criminal prosecution rules for tax fraud

Other measures in the new tax law concern:

  • New liabilities for e-commerce platforms
  • Enhanced penalties in relation to tax fraud cases
  • New penalties as sanctions imposed on intermediaries that helped put into effect certain fraudulent schemes and operations
  • The introduction of a process to “name and shame” fraudulent companies
  • New plea and transactional procedures in fraud cases

Automatic transfer of “severe cases” to public prosecutor

One measure reflects changes to the ability of the French tax authorities to select those cases that could end up being prosecuted. Previously, the rules from a “Tax Infringements Commission” (often pejoratively described as a “padlock of the Ministry of Finance” or “Verrou de Bercy”) required approval or assent for a case to be transferred to the criminal judiciary authorities.

However, under Article 36 of the new law, the tax authorities now must automatically transfer cases to the public prosecutor when the tax audit procedure reveals that the amount of tax eluded satisfies a €100,000 threshold and in particular relates to:

  • Application of one of the following tax penalties: (1) 100% for opposing a tax audit; or (2) 80% for hidden activity or abuse of law ; or 
  • Application of one of the following 40% tax penalties, if the taxpayer had already undergone tax audits that in turn gave rise to tax penalties of 100%, 80% or 40% during the last six calendar years: (1) 40% for failure to file tax returns within 30 days of the receipt of the formal notice to produce it; (2) 40% for deliberate failure/bad faith; or (3) 40% for abuse of law (in instances when the taxpayer is not the principal instigator or the main beneficiary of the abusive construction)

The conditions of the automatic transfer must be determined at the time when the tax collection notice is issued and, in cases when there is a settlement, upon notification of the final financial consequences to the taxpayer. The automatic transfer to the prosecutor is not to apply in instances of a “spontaneous regularization” by the taxpayer that is outside the scope of a tax audit.

Related tax fraud procedural changes

Because the suppression of the administrative “padlock” is expected to increase the number of cases transferred to criminal judiciary authorities, the new law provides for the following new settlement methods with regards to tax matters:

  • Article 24 introduces a form of guilty plea applicable for tax fraud cases (that would avoid a judicial action)
  • Article 25 allows an option of entering into a transaction with the judicial authorities even in cases of criminal lawsuit (this is a procedure similar to a deferred prosecution agreement in the United States).
  • Article 35 allows the French tax authorities to reach a settlement even if there are pending criminal judicial actions.

On the other hand, Article 23 provides judges with new computation possibilities beyond the existing penalties for cases related to fraud or aggravated fraud. The judges now have the ability to determine the amount of a penalty by multiplying two-fold (for individuals) or ten-fold (for legal persons) the assessed value of the proceeds derived from the tax fraud. Under this measure, prison sentences have not been modified, and criminal fines may add up to the tax sanctions/reassessments already applicable. 

Article 18 introduces the “name and shame” measures for legal entities responsible for serious tax infringements such as an abuse of the law. Information on the company could be made public on the administration’s webpage for a maximal period of one year. Nonetheless, this publication would not be automatic, and requires that the “Tax Infringement Commission” grant its consent. Also, a taxpayer could contest the publication of its information before the courts. By contrast, Article 16 provides for the automatic public release of court decisions related to tax fraud (applicable either to legal persons or individuals), with the judge having the authority to decide the formal modalities of such communication.

New tax fraud penalties

Article 19 introduces new penalties for intermediaries that helped taxpayers implement tax fraud schemes that trigger the application of the 80% penalty (for example, penalties triggered by abuse of law, deliberate mistakes, or omissions in tax returns, etc.). The penalties are aimed at intermediaries, in particular tax advisors and tax lawyers that intentionally help to implement a tax fraud scheme, or that realize any kind of operations aimed at misleading the French tax authorities.

The penalty equals 50% of the fees derived from the services rendered to the taxpayer, with a minimum penalty of €10,000. The new measure applies for advisory services rendered as from 25 October 2018. It is estimated that this penalty could apply to about 2,500 cases per year.

Reporting to shareholders

Article 20 of the new law requires listed entities to report annually to their shareholders about their activities with respect to measures to counter tax evasion. 

 

For more information, contact a tax professional with Fidal* in France or with the KPMG member firm in France: 

Audrey-Laure Illouz | + 33 (0) 1 55 68 14 95 | audrey-laure.illouz@fidal.com

Laurent Chetcuti | + 33 (0) 1 55 68 14 47 | laurent.chetcuti@fidal.com  

Patrick Seroin | + 33 (0) 1 5568 4802 | patrickseroin1@kpmgavocats.fr  

* Fidal is a French law firm that is independent from KPMG and its member firms.

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