The 2014 Finance Act provided for the creation of an obligation to declare tax optimization schemes to the tax authorities (Article 96) and the modification of the concept of abuse of law (Article 100).
As a reminder, the obligation to declare “tax optimization schemes” to the tax authorities aimed to institute the disclosure of such schemes before their commercialization or implementation. They are defined as being, “the combination of legal, tax, accounting and financial processes and instruments (…) whose main purpose is to lower a taxpayer’s tax burden, to defer due dates or payment, or to obtain a refund of a tax or a contribution”. Furthermore, these schemes had to satisfy various criteria specified in a decree to be issued by the French supreme administrative Court (Conseil d’Etat).
If a party breached its obligation to declare a tax optimization scheme, the applicable penalty was either (i) a fine applicable to the legal person who market the optimization schemes, equal to 5% of the amount of the money earned for the marketing of the tax optimization scheme, or (ii) a fine of 5% of the amount of the tax benefit obtained by the implementation of the tax optimization scheme, for the legal person who implement the scheme.
In addition, the new definition of “abuse of law” broadened the scope of this concept by providing that an abuse of law could henceforth be proven if the main statement of reasons of an act was to reduce the tax burden. This reform put an end to the requirement that an act’s purpose be exclusively tax driven in order to prove that an abuse of law had been committed.
These two measures, introduced by a way of amendments in the French National Assembly, were finally adopted.
Nonetheless, the French Constitutional Court (Conseil Constitutionnel) cancelled those two measures, ruling that, “the legislature must fully exercise the powers vested by the Constitution and, in particular, by Section 34: the constitutional principle of accessibility and understandability of the law, which results from Sections 4, 5, 6 and 16 of the Declaration of the Rights of Man and of the Citizen of 1789, that requires the adoption of sufficiently precise provisions and unequivocal wording so as to protect legal subjects against an unconstitutional interpretation or against the risk of arbitrariness, without relying on administrative or judicial authorities to establish the rules which, pursuant to the Constitution, must be determined by the law.”
More specifically, the French Constitutional Court cancelled the mechanism that instituted an obligation to declare tax optimization schemes to the tax authorities, before their commercialization or implementation, considering that: “[…] given the restrictions of the disputed provisions to the entrepreneurial freedom and, in particular, to the conditions for practicing as a legal and tax adviser, and given the heavy penalties for violating these provisions, the legislature did not have the right to use such a general and imprecise definition of the concept ‘tax optimization scheme’ without violating the aforementioned constitutional requirements.”
As regards the broadening of the concept of abuse of law, after having recalled how this procedure works, the Constitutional Court pointed out that the, “such a modification of the definition of an act that constitutes an abuse of law confer a significant discretionary power to the tax authorities.”
Therefore, the Constitutional Court cancelled this measure, pointed out that “given the consequences of the abuse of tax law procedure and considering the aforementioned constitutional requirement, the legislature did not have the right to state that acts ‘whose main purpose’ is to avoid or lower the tax burden that a taxpayer should have normally borne constituted an abuse of law.”