Tax avoidance (évasion fiscale) aims to reduce taxation by exploiting loopholes in the tax system in order to circumvent it. It concerns individuals as much as businesses. Tax avoidance is a way of avoiding tax that lies on the borderline of tax fraud.
New rules came into force in January 2019 to combat tax avoidance. Your tax lawyer describes them for you.
What is tax avoidance?
Tax avoidance consists in reducing or eliminating a taxpayer’s taxation on their profits and any other income. The most commonly used technique is the transfer of assets or income from an activity to another country, known as a tax haven, where taxation is lower. In France, tax avoidance represents 60 to 80 billion euros per year according to the report of the Solidaire-finances publiques trade union.
The notion remains rather vague, since it can be close to tax fraud. Nevertheless, a distinction must be drawn between tax avoidance, which uses legal means, and tax fraud, which is totally illegal. However, tax avoidance may in some cases be likened to tax optimisation, which consists in using tax law to reduce the amount of tax while complying with the tax obligations of one’s country.
Am I concerned?
You are concerned if you have attempted to reduce the amount of tax you are theoretically liable to pay by resorting to tax arrangements. Certain tax avoidance practices are legal, such as putting in place advantageous tax agreements (rulings) in a country. However, if it relies on illegal techniques, in particular on arrangements whose purpose is solely tax-driven, tax avoidance can become fraud.
Certain tax arrangements may be considered abusive by the French tax authorities. This is the case with the use of trusts, of property holding companies (sociétés civiles immobilières, SCI), the use of gold, round-trip insurance contracts or salaries paid abroad for the sole purpose of circumventing French tax.
The relocation of profits abroad may also be among the arrangements that constitute tax avoidance. In this arrangement, the largest share of profits is allocated to subsidiaries established in the country where tax is lowest or even zero. Economies characterised by the absence of any type of taxation are referred to as zero-havens. Other so-called accommodating administrative practices exist, such as in Bermuda, which offers a guarantee of exemption. In practice, caution should be exercised with regard to this type of complex and often illegal transaction.
The purpose of holding companies is to manage shareholdings in the capital of other companies. These holding companies are also very often used as a tax optimisation technique, for example by being a shareholder of a company established in France. They thus serve as a tax instrument when dividends are passed up to the holding company without being taxed by means of international treaties, or when a significant share of profits is relocated to these holding companies.
The trust is a legal mechanism derived from Anglo-Saxon law for which there is no equivalent in France. A trust is an institution bringing together the settlor, who relinquishes ownership of certain assets, the trustee and the beneficiary. The trust involves a separation between economic and legal ownership of the assets. Thus, an individual may not appear as the owner of their assets in the eyes of the tax authorities.
Trusts are quite often used in tax avoidance arrangements.
What are the risks?
By engaging in tax avoidance, the taxpayer may face heavy tax reassessments but also criminal prosecution.
From a tax standpoint, arrangements are mainly countered by the theory of abuse of law (abus de droit), which is codified in Article L 64 of the Tax Procedure Code (Livre des Procédures Fiscales, LPF). The tax authorities may disregard acts whose legal appearance conceals the real nature of the transactions carried out; you nevertheless retain the possibility of challenging this through sophisticated legal arguments that your tax lawyer will be able to point out to you. In that case, they may assess the tax that would have been due in the real situation. In other words, the tax authorities may call into question the genuineness of certain legal acts and thwart schemes intended to evade tax by using apparently regular legal structures.
The theory of abuse of law does not prohibit the taxpayer from choosing between several solutions to carry out a transaction. They may opt for the most advantageous choice from a tax standpoint. Where the legal acts on which this solution is based are in order, there is no abuse of law.
The abuse of law procedure is implemented during a tax audit. However, the taxpayer may challenge the adjustments notified. When this is the case, the dispute is referred to the Abuse of Tax Law Committee (Comité de l’abus de droit fiscal). The Committee may be referred to by the tax authorities or the taxpayer, who are invited to submit their observations.
The burden of proof lies with the tax authorities, whether or not the matter has been referred to the Committee and whatever the nature of its opinion.
Abuse of law is penalised by the concurrent application of late-payment interest and a surcharge equal to 80% of the sums reassessed if the taxpayer is the main instigator or the main beneficiary of the abusive acts, or 40% where this proof is not provided.
The new measures to combat tax fraud
To combat abuses in the field of tax avoidance, the European Union has introduced new rules in effect since January 2019. Member States will now be able to tax profits transferred to low-tax countries where the company in question carries out no genuine economic activity.
A specialised investigation service, the financial judicial investigation service (service d’enquêtes judiciaires des finances, SEJF), was created in 2019 (Decree No. 2019-460 of 16 May 2019) to combat tax fraud. In addition, a guilty plea procedure has been introduced for fraudsters facing criminal prosecution. This will speed up proceedings by avoiding a trial through acceptance of the penalty proposed by the public prosecutor’s office. Algorithms are going to be used to analyse data and better target audits. France will also review its list of tax havens by incorporating new criteria.
