The French Tax Administration Intends To Incentivize Taxpayers that Have Already Entered into Abusive Schemes To Regularize Their Situation

BACKGROUND

In July 2014, the French tax authorities released a first list of 11 abusive tax schemes. This list was generally viewed as non-contentious as it described obvious cases of abuses of law, which were not relevant for most corporate taxpayers.

On April 1, 2015, the French tax authorities released an additional list of 17 tax schemes and indicated that the list should be supplemented in the future. In most cases, the description of such schemes is not very helpful as the tax administration sets forth very basic and rudimentary schemes. However, the tax administration provided some guidance on the possibility for taxpayers to regularize their situations, and announced the creation of a National Expert Committee, which will assist the tax administration in the context of complex tax reassessments.

CERTAIN ABUSIVE TAX SCHEMES INCLUDED IN THE LIST

  1. Management packages

The policy of the French tax administration vis-à-vis management packages was, until recently, to recharacterize all capital gains realized by managers/employees as salary income, irrespective of the terms and conditions of such packages. 

The description provided in the new list of tax schemes could be seen as an evolution of this approach as the tax authorities indicate the criteria that could trigger a reassessment, which seems to imply that those packages that would differ from such a pattern should not be reassessed. According to the tax administration, a reassessment shall be possible if (i) the manager benefitted from “preferential conditions” in the acquisition or sale of the shares, (ii) the possibility to invest in the package was linked to the status as manager/employer of the company, and (iii) the manager did not bear any financial risk or a nominal risk. The last criterion would in most cases be the key element. 

  1. Issuance of bonds redeemable in shares coupled with a dividend distribution

The French tax authorities consider that the issuance of bonds redeemable in shares for the benefit of a shareholder, coupled with a dividend distribution for the benefit of the same shareholder, can be abusive as it purports to render dividend payments deductible.

Under such a scheme, a shareholder subscribes to bonds redeemable in shares issued by its subsidiary, which in turn makes a dividend distribution for the same amount. There is no cash flow between the two entities: the dividend is paid by setting-off the receivable of the subsidiary relating to the bond subscription.

  1. Intra-group restructurings aimed at shifting profits into a low-tax jurisdiction

The French tax authorities intend to catch the situation whereby a restructuring resulting in a transfer of businesses within the group is carried out as a way to shift profits into low-tax jurisdictions. For instance, a French manufacturer becomes a sub-contractor of an affiliate located in a low-tax jurisdiction which then receives part of the margin initially reported by the French entity.

As an indicator of the abusive nature of such schemes, the authorities will look at the changes in the prices invoiced between entities of the group in light of the risks and functions actually transferred, especially when the flows of raw materials and products within the group have remained the same.

  1. Conduit companies 

Based on the description provided by the tax administration, a French company would pay royalties to a treaty eligible foreign entity in consideration for the use of its brand. The foreign entity would then pass on the royalties to another entity located in a low-tax jurisdiction which has not entered into an income tax treaty with France. Unfortunately, the tax administration does not provide any guidance on which criteria would be taken into account to determine whether such a scheme would be viewed as abusive.

  1. Shareholding reorganization to avoid the application of withholding taxes on dividend payments

The French tax authorities intend to cover schemes whereby a French company distributes dividends to a shareholder located in an EU member State and benefits from the participation exemption regime. This would be the case when a shareholder is controlled by another entity located in a non-EU member State and the shareholder located in the EU member State does not have any substance. This situation was viewed as an abuse of law by the Abuse of Law Committee (Comité de l’abus de droit) in its decision n° 2013-25.

  1. Double deduction of interest in France

Under such a scheme, a French tax resident company enters into a financing to fund the equity of its affiliate which is located in a jurisdiction where it is entitled to deduct notional interest computed on its equity (for instance, Belgium). The Belgian entity then lends the proceeds to a French affiliate, but reports a small taxable profit due to the deduction of the notional interest. Such a scheme results in a double deduction of interest in France.

REGULARIZATIONS

The publication of such tax schemes does not constitute a change in the applicable law. However, the tax administration indicated that such tax schemes would trigger a penalty of 40% or 80% if reassessed.

The French tax authorities have emphasized that, in the case of a voluntary regularization, penalties will be applied on a case-by-case basis taking into account each situation and in light of the voluntary step taken by the taxpayer. The French tax authorities have not however provided any guarantee that there would be a reduction of the applicable penalties if the transaction is disclosed on a voluntary basis, nor any guidelines on how to report such transactions.

THE NATIONAL EXPERT COMMITTEE

The tax administration announced the creation of an advisory committee composed of tax experts (law professors, tax directors and judges). This committee will be consulted by the tax authorities in complex tax audits. No guidance is provided as to the procedure before such committee, whether the taxpayer will be represented, or whether the opinion of the committee will be shared with the taxpayer. The committee will also advise on which schemes should be included in the list of abusive schemes.

This committee will not be an arbitral body that could decide on pending audits or litigations. However, one could expect that the tax inspectors in charge of a tax audit may be willing to find a compromise in cases for which the committee has ruled in favor of the taxpayer. If this is confirmed, the role of the committee would be similar to that of the “tax cell” (cellule fiscale) that used to advise the Minister of Finance on complex and/or significant tax reassessments.