Tax avoidance (évasion fiscale) consists in reducing or avoiding tax by using the possibilities, or even the loopholes, of the tax system, often by playing on the differences between States. It concerns individuals as well as businesses and lies on the borderline of tax fraud: lawful as long as it respects the letter and spirit of the texts, it may be challenged as an abuse of law where it relies on artificial schemes.
Since 2019, new rules stemming from the European directive known as ATAD have strengthened the fight against tax avoidance. This article presents the main concepts and the risks involved, without replacing a lawyer’s analysis of a particular situation.
In brief
- Tax avoidance is not unlawful in itself, but it is limited by the abuse of law rules (articles L64 and L64 A of the Tax Procedure Code).
- Sham schemes, or schemes motivated solely by tax considerations, may be disregarded by the tax authorities.
- Abuse of law is penalised by an 80% surcharge (40% in certain cases), in addition to late-payment interest.
- Trusts, holding companies and companies established abroad are subject to specific rules under French tax law.
- The burden of proving abuse of law in principle lies with the tax authorities.
Contents
What is tax avoidance?
Tax avoidance consists in reducing, or even eliminating, tax on one’s income, profits or assets. The best-known technique is transferring assets or income to a country with lower taxation. Its cost to public finances is the subject of widely varying estimates: the Solidaires Finances publiques union, for example, estimated in 2018 the revenue lost through tax fraud and avoidance at between €80 and €100 billion a year.
The concept is vague, because it is close both to tax optimisation, which consists in choosing, among the solutions permitted by law, the one that is taxed least, and to tax fraud, which is unlawful. In practice, the borderline lies at the level of abuse of law.
Am I concerned?
Anyone who organises his or her situation, in particular an international one, so as to reduce tax may be concerned. Choosing the least-taxed solution is in principle legitimate. On the other hand, where a scheme is sham or artificial and was motivated solely by tax considerations, the tax authorities may disregard it; in the most serious cases, the facts may also constitute fraud.
Certain schemes attract particular attention from the French tax authorities when they are used solely to circumvent French tax:
- the use of trusts or interposed foreign structures;
- “round-trip” insurance contracts or transactions in gold;
- salaries paid abroad without economic justification;
- the artificial location of profits in companies established in countries with low or zero taxation;
- the interposition of holding companies lacking substance.
Holding companies are nevertheless legitimate management tools, which make it possible to hold and manage shareholdings. They may, however, be challenged where they lack substance and serve solely to benefit from a tax regime or a tax treaty, for example to upstream dividends free of tax.
Trusts
A trust is a legal mechanism of Anglo-American origin, with no exact equivalent in French law, whereby a settlor transfers assets to a trustee, who manages them for the benefit of beneficiaries. It has long been used in tax avoidance schemes, as it separates the legal ownership of assets from their economic benefit.
Since 2011, French tax law has specifically regulated trusts with a connection to France: reporting obligations for trustees, inclusion of trust assets for real estate wealth tax and for inheritance and gift tax, and a specific levy where no return is filed. These rules are presented on the pages dedicated to UK trusts and US trusts.
What are the risks?
Tax avoidance exposes the taxpayer to heavy tax reassessments and, where the facts amount to fraud, to criminal prosecution.
Abuse of law
Schemes are mainly countered by the abuse of law procedure (article L64 of the Tax Procedure Code, LPF). The tax authorities may disregard sham transactions, as well as those which, seeking the benefit of a literal application of the texts contrary to the objectives pursued by their authors, could not have been motivated by any reason other than avoiding or reducing tax. They then establish the tax due on the basis of the actual situation.
For transactions carried out since 2020, the tax authorities may also disregard those whose motive is mainly, and no longer exclusively, tax-related (article L64 A of the LPF), without applying the surcharges specific to abuse of law.
Abuse of law does not prohibit choosing, among several solutions, the one that is most advantageous from a tax point of view: where the transactions are genuine and consistent with the purpose of the texts, there is no abuse of law. The taxpayer may challenge the adjustments, in particular with the help of a lawyer.
The abuse of tax law committee
In the event of disagreement on the adjustments, the dispute may be referred to the abuse of tax law committee (comité de l’abus de droit fiscal), at the request of the taxpayer or of the tax authorities. The burden of proof in principle lies with the tax authorities, whether or not the committee has been consulted and whatever its opinion. The taxpayer may then challenge the adjustments before the court.
Penalties
Abuse of law is penalised, in addition to late-payment interest, by a surcharge of 80% of the tax reassessed where the taxpayer was the main initiator or the main beneficiary of the transactions, and of 40% in other cases.
Measures to combat avoidance and fraud
Since 1 January 2019, the rules stemming from the European ATAD directive have in particular strengthened the limitation on the deduction of businesses’ financial expenses and the taxation, in France, of profits held in companies established in low-tax countries without genuine economic activity.
The law of 23 October 2018 on combating fraud also opened the “guilty plea” procedure to tax fraud, and a judicial financial investigation service (SEJF) was created in 2019. The tax authorities also use data mining to target their audits, and the French list of non-cooperative States and territories is regularly updated.
What I see in my cases
I am sometimes approached, often by young people influenced by videos seen on TikTok or YouTube, to approve or comment on schemes relying on companies abroad, in Estonia or the Emirates for example. In the cases presented to me, these schemes no longer fell, in my view, within tax optimisation: they went well beyond it, and I cannot assist with these projects.
Lawful tax optimisation exists, sometimes thanks to tax treaties, but it rests on a genuine situation and on rules that are correctly applied. Only an analysis of each case by a lawyer can determine whether or not a treaty can reduce French tax.
FAQ
Is tax optimisation lawful?
In principle yes: choosing, among the solutions permitted by law, the one that is taxed least is legitimate. Optimisation becomes abusive where it relies on sham or artificial transactions motivated by an exclusively tax purpose (abuse of law) or, for transactions carried out since 2020, a mainly tax purpose.
What is the difference between tax avoidance and tax fraud?
Tax fraud consists in unlawfully evading tax, for example by concealing income; it is a criminal offence. Tax avoidance uses apparently lawful means; it is not unlawful in itself, but it may be challenged by the tax authorities as an abuse of law.
Is it prohibited to hold a trust or a company abroad?
In principle, no. These structures are lawful, but they are subject to reporting obligations and specific tax rules in France. Their use for an exclusively tax purpose may be challenged.
