• France1
  • France2
  • France3
  • 1
  • 2
  • 3

French Tax Law – abuse of law

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. No liability is accepted by the author or Sykes Anderson Perry Limited in respect of this article. Tax law is a complex subject and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice.

A recent French Supreme Court decision (CE, 25 oct 2017, 396954) considered abuse of law in the context of international tax planning. The decision is illuminating as to the circumstances in which a transaction will be set aside as abusive. It shows how the French courts will use Article L. 64 to set aside steps they view as abusive.

The facts

The taxpayer signed a contract in his personal name to buy some land in the Alps in 2003 for €2.9M. Shortly after this he incorporated a Luxembourg company which was substituted as the buyer and the purchase was completed in the name of the Luxembourg company. In November 2005 the Luxembourg company sold the property to a French company for €4.9M. The director of the French company was the former spouse of the taxpayer. The company paid no French capital gains tax because Article 4 of the France – Luxembourg treaty of 1 April 1958 operated to exempt the gain from Capital Gains Tax in France and no tax was payable in Luxembourg. Incidentally these provisions in the tax treaty no longer apply and such gains are now taxed in France.

Article L. 64

The French tax authority sought to set the substitution of the Luxembourg company aside on the basis that it had only been used by the taxpayer to avoid French capital gains tax at 33% on the gain. The tax administration relied on Article L. 64 of the Tax Procedure Rules. The key part of Article L. 64 allows any document which hides the true meaning of a contract or an agreement which disguises the implementation of income to be set aside. The key wording in French is “...les actes qui dissimulent la portée véritable d'un contrat ou d'une convention à l'aide de clauses (...) qui déguisent soit une réalisation, soit un transfert de bénéfices ou de revenus...

Supreme Court Decision

The French Supreme Court decided that there was no economic, organisational or financial reason for using the Luxembourg company. The company had not developed any property activity after the acquisition. The introduction of the Luxembourg company was set aside and the taxpayer was personally liable to pay the tax.

There was no challenge here from the French tax authority that the Luxembourg company lacked substance and was a sham. The company in fact had very substantial capital. The judgment was on basis that the company had no other reason for being involved in the transaction other than to enable the taxpayer to avoid Capital Gains Tax.

Our comments

Cases like this involving tax treaties are quite rare and illuminating. There seems to have been a lack of foresight and planning by the taxpayer in this case. It would have been better for the taxpayer for all negotiations for the initial purchase to have been conducted through the Luxembourg company and for the contract to be signed by the company. The taxpayer personally should not have signed the contract. The Luxembourg company should have had other property activities which could have included prospecting for other property business. This should have been both before and after the purchase and sale. Selling this property and buying another would have been a good move as it would show an ongoing property activity. In addition selling the property to a company controlled by the taxpayer’s former spouse must have coloured the judge’s decision.

Although not relevant in this case, it would have helped greatly if some tax had been payable by the company in Luxembourg. It would have been much harder for the French court to set aside a transaction if the transaction was viewed as valid in Luxembourg and corporate tax paid there on that basis. The French court decision would mean the Luxembourg corporation tax would have to be refunded or set off in some way against the French personal tax to avoid double taxation.

The moral of the story is to get your planning right from the start. If a “hot deal” presents itself you are best stepping back and assessing the best way to do it rather than rush in.

March 2018
David Anderson
Solicitor-Advocate and Chartered Tax Adviser