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French National Report

Emmanuel Raingeard de la Blétière*

1. The meaning of avoidance and aggressive tax planning and the BEPS initiative

As a matter of introduction, it seems necessary to define the key concepts to be used in the following section. Indeed, nowadays, several terms are used to designate some concepts that are widely used but often undefined such as “tax fraud”, “tax evasion”, “tax avoidance”, “tax arbitrage”, “tax optimization”, “tax planning”, “aggressive tax planning”, “abusive tax planning”…

If the terms “tax fraud” and “tax evasion” in English are broadly synonyms, it seems that one is used to designate criminal matter and not necessarily the other.

Looking at the IBFD International Tax Glossary, “tax fraud” may be considered as “a form of deliberate evasion of tax that is generally punishable by law. The term includes situations in which deliberately false statements are submitted, fake documents are produced, etc. Sanctions may include civil or criminal penalties.”1 The OECD glossary2 definition is broadly similar but clearly mentions that “fraud” is “generally punishable under criminal law”. The European Commission in its communication took this definition3.

“Tax evasion” is defined by the IBFD International Tax Glossary “as intentional illegal behaviour, or as behaviour involving a direct violation of tax law, in order to escape payment of tax. Tax evasion is generally accompanied by penalties that may be, but are not always, criminal in nature. Deliberate underreporting of taxable income would generally be considered an example of tax evasion.”4 The OECD definition adds that it is “a term that is difficult to define” but in general refers to “illegal arrangements where liability to tax is hidden or ignored”5. The European Commission in its communication took this definition6.

“Tax avoidance” is “a term used to describe taxpayer behaviour aimed at reducing tax liability which falls short of tax evasion. While the expression may be used to refer to ‘acceptable’ forms of behaviour, such as tax planning, or even abstention from consumption, it is more often used in a

1*The author wishes to thank Valentin Leroy, Ph.D candidate and associate at PwC Société d’avocats for his help in making the researches. IBFD International Tax Glossary, 5th ed., p. 186 (B. Larking ed., IBFD 2005). 2 OECD, Glossary of Tax Terms, available at http://www.oecd.org/ctp/glossaryoftaxterms.htm (accessed 1 Feb. 2016). 3 European Commission, Communication from the Commission to the European Parliament and the Council on concrete ways to reinforce the fight against tax fraud and tax evasion including in relation to third countries, COM(2012) 351, p. 2, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52012DC0351 (accessed 1 Feb. 2016). 4 IBFD International Tax Glossary, supra n. 1, at p. 157. 5 OECD, supra n. 2. 6 European Commission, supra n. 3, at p. 2. pejorative sense to refer to something considered ‘unacceptable’, or ‘illegitimate’ (but not in general ‘illegal’). In other words, tax avoidance is often within the letter of the law but against the spirit of the law. It generally contains elements of artificiality, e.g. as to the legal form adopted, and may often be considered to be contrary to the spirit of the law. However, its scope may vary from country to country, depending on attitudes of government, courts and public opinion. Some jurisdictions appear not to recognize the concept on the grounds either that the behaviour is legitimate or, if illegitimate, that it constitutes evasion. Examples of tax avoidance include locating assets in offshore jurisdictions, conversion of income to non- or lower-taxed gains”7 etc. (emphasis added). According to the OECD definition it is “A term that is difficult to define but which is generally used to describe the arrangement of a taxpayer's affairs that is intended to reduce his tax liability and that although the arrangement could be strictly legal it is usually in contradiction with the intent of the law it purports to follow.”8

“Tax planning” is defined by the IBFD and the OECD glossary as: “Arrangement of a person's business and/or private affairs in order to minimize tax liability” 9.

Finally, the concept of “aggressive tax planning” does not appear in these glossaries. The European Commission defined it in its recent recommendation: “Aggressive tax planning consists in taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability. Aggressive tax planning can take a multitude of forms. Its consequences include double deductions (e.g. the same loss is deducted both in the state of source and residence) and double non-taxation (e.g. income which is not taxed in the source state is exempt in the state of residence).”10, it “includes the use of artificial operations or structures and the exploitation of mismatches between tax systems with the effect of undermining Member States' tax rules and exacerbating the loss of tax revenues.”11

To make things more difficult, the French translation of those words includes many false cognates and some institutions have made mistakes in translating some of those them from English to French. The IBFD International Tax Glossary stresses that: “The term ‘evasion’ tends to be used in French- speaking countries to refer to the concept of tax avoidance, while ’tax fraud’ is used to refer to the concept of tax evasion.”12

Looking at the ECJ13 decisions, indeed fraude fiscale is translated by “tax evasion” and évasion fiscale by “tax avoidance”. The same is true for the EU legislator14. However, in its above mentioned communication, the European Commission translated the term “tax fraud” by fraude fiscale and “tax

7 IBFD International Tax Glossary, supra n. 1, at pp. 29-30. 8 OECD, supra n. 2. 9 IBFD International Tax Glossary, supra n. 1, at p. 407 and OECD, supra n. 2. 10 European Commission, Commission Recommendation of 6 December 2012 on aggressive tax planning, COM/2012/772/EU, recital 2, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex %3A32012H0772 (accessed 1 Feb. 2016). 11 European Commission, supra n. 3, at p. 3. 12 IBFD International Tax Glossary, supra n. 4. See also B. Delaunay, Où commence l'optimisation fiscale internationale ? Fraude, évasion fiscale et tax planning, Dr. fisc. 2013, n. 39, 437. 13 See, for example, UK: ECJ, 12 Sept. 2006, Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, [2006] I-07995, ECJ Case Law IBFD, paras. 27 and 50 ; NL: ECJ, 29 Nov. 2011, Case C-371/10, National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam, [2011] I-12273, ECJ Case Law IBFD, paras. 83 and 84. evasion” by évasion fiscale15. Recently the French parliament in a report (not in legislation) referred to the definition of the OECD glossary of “fraud”, “evasion”, “avoidance”, “planning” and translated them in French by referring to fraude, évasion, évitement, optimisation.

1.1. The meaning of tax avoidance in the French legal system

There is no definition of “tax avoidance” in French tax law, whether one would refer to its translation as évasion fiscale or évitement. None of those terms are defined. Administrative regulations are also not providing any definition of this term even where it sometimes refers to it16. The lack of definition is even more surprising taking into account that the words “évasion fiscale” is used in the General Tax Code (Code général des impôts, CGI) and in the case law of the French Court of Cassation (Cour de cassation, Cass.) and the French Administrative Supreme Court (Conseil d’Etat, CE).

Tax “rulings” exist in France and cover different categories. They are generally optional.

For instance, any taxpayer can request the tax authority with the confirmation of the interpretation of the law under article L80 A of the Tax Procedure Code (Livre des procédures fiscales, LPF) and the position of the tax authorities on the application of a provision to its factual situation (especially under article L80 B, 1° of the LPF and some specific provisions such as article L80 B, 6° applicable to case of permanent establishment or 7° on advance pricing agreement).

Article L64 B of the LPF provides for a specific procedure applicable to obtain the confirmation that a scheme is not an abuse of law. The taxpayer should provide to the French Tax Authorities (“FTA”) all the relevant information necessary to assess the abusive nature of the transaction. If the FTA does not reply within six months the abuse of law procedure would not be applicable.

If they may not fall, stricto sensu, within the definition of “ruling”, one would stress that French tax law also provides for “pre-authorization procedure”, which are, in some cases, compulsory. They are required for companies to implement some transactions in the context of intra-group reorganization. For instance17, in case of a cross-border merger, demerger or contribution, article 210 C of the CGI obliges the taxpayer to request such an “authorization” from the FTA in order to benefit from a tax neutral regime18. This approval will be delivered under some conditions amongst which that the

14 See, for example, EU Merger Directive (2009): Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States (Codified Version), art. 15, para. 1, OJ L 310 (2009), EU Law IBFD. 15 European Commission, supra n. 3. 16 FR: DGFiP, BOI-SJ-AGR-20-10-20121203, para. 150 and BOI-SJ-AGR-20-20-20140716, para. 220. These administrative guidelines (and the others quoted hereafter) may be found on http://bofip.impots.gouv.fr/bofip/1- PGP.html. (accessed 1 Feb. 2016). 17 Another example can be found in article 115 quinquies of the CGI. This provision (and the others quoted) may be found on http://www.legifrance.gouv.fr/. 18 This regime is providing for in the (EU) Merger Directive (2009/133). On should stress that in a domestic context those authorizations are not required if some conditions are met. This leads to a difference of treatment. The Conseil d’Etat has recently raised a request for a preliminary ruling to the ECJ on its compatibility (FR: CE, 30 Dec. 2015, n. 369311, 369316, 369317, Société Euro Park Service). This decision (and the others quoted hereafter – except where another source is mentioned) may be found on http://www.legifrance.gouv.fr/ (accessed 1 Feb. 2016). operations does not have “as its principal objective or as one of its principal objectives tax evasion or tax avoidance“19.

The administrative guidelines does not define the terms used but mention that the notion of “principal objective of tax evasion or tax avoidance” is broader than the French GAAR which is the “abuse of tax law”20. Note than in another guidelines, under the heading “Non tax principal objective”, the FTA adds that the operations should not have as an effect to withdraw French right to tax on the capital gains21, introducing the idea that it would reject request having such result even where this would not be the objective of the transaction.

In one case related to those cross-border reorganization – article 210 C of the CGI – the Administrative Court of Appel of Paris22 has confirmed that a reorganization could be seen as being motivated by “tax evasion or tax avoidance” when it had no valid “economic motivation” which was deduced from the facts that French real estate companies were merged, without taxation of unrealized capital gains due to the application of the tax neutral regime that was applied by the taxpayer without requesting the authorization to the tax authorities, in a Luxembourg resident company and that all real estate assets were then sold in a French tax-free way as a result of the French interpretation of the applicable double tax treaty.

The Court did not qualify the situation i.e. whether it was tax evasion or tax avoidance. Especially, the penalties applied to the taxpayer were only the 40% penalties and not the 80% one and one should also mentioned that the management of the Luxembourg company has been charged with criminal charges with respect to this scheme23. It is worth mentioning that the case is pending before the Supreme Administrative Court, which has raised a preliminary question to the ECJ24.

The French Constitutional Council (Conseil constitutionnel, Cons. const.) does not seem to distinguish one and the other. It deduced from the constitutional principle of equality before tax constitutional principle25 those objectives of fight against tax evasion and against tax avoidance and considered that they were ranking as constitutional objectives26.

19 In French, “comme objectif principal ou comme un de ses objectifs principaux la fraude ou l’évasion fiscales“ (article 210 B, 3 of the CGI). This provision is supposed to implement the (EU) Merger Directive (2009/133) and this sentence is actually the same than article 15, para. 1(a) of the said directive. The translation in the main text is the one used in the directive. 20 FR: BOI-SJ-AGR-20-10-20121203, para. 150. 21 FR: BOI-SJ-AGR-20-20-20140716, para. 220. 22 FR : CAA Versailles, 11 Apr. 2013, n. 11PA03447, 11PA03448, 11PA03449, Société Euro Park Service. 23 See FR: Cass., 22 Oct. 2014, n. 13-84419, John-Charles X. Please note however that the two procedures are completely independent and one may not use the result of the criminal case to interpret the administrative one. 24 Société Euro Park Service (2015). 25 This principle is enshrined in article 13 of the Declaration of Human and Civil Rights of 26 August 1789 (which has the same legal value as the Constitution). See for example FR: Cons. const., 29 Dec. 1983, n. 83-164 DC, Loi de finances pour 1984, para. 26 and 27; Cons. const. 29 Dec. 1999, n. 99-424 DC, Loi de finances pour 2000, para. 52; Cons. const., 29 Dec. 2003, n. 2003-489 DC, Loi de finances pour 2004, para. 10; Cons. const., 21 Jan. 2010, n. 2009-598 DC, Loi organique modifiant le livre III de la sixième partie du code général des collectivités territoriales relatif à Saint-Martin, para. 2; Cons. const., 20 Apr. 2012, n. 2012-236 QPC, Mme Marie-Christine J. (Fixation du montant de l'indemnité principale d'expropriation), para. 7 and Cons. const., 20 Jan. 2015, n. 2014-437 QPC, Association française des entreprises privées et autres (AFEP), para. 9. See also the commentary on the decision AFEP, available at http://www.conseil-constitutionnel.fr/conseil- constitutionnel/root/bank/download/2014437QPC2014437qpc_ccc.pdf (accessed 1 Feb. 2016). Besides, the Conseil constitutionnel has recognized that the objective of avoidance of tax optimization is a reason of general interest that can in some cases justify a difference of treatment of comparable situation. For instance, the Conseil constitutionnel considered that the legislator may close a choice that a taxpayer has in order to avoid a tax optimization even where this leads to create a difference of treatment27.

One may find some tentative definitions of tax avoidance (évasion fiscale) in some reports from the French Parliament but they do not define clearly the concept. Beside they do not always keep the same definition. It is worth mentioning that sometimes the Parliament and part of the doctrine consider that tax avoidance is in the grey area between tax evasion and tax optimization 28. A special administrative body also stated that tax avoidance using illegal mean is tax evasion but using legal mean is tax optimization29.

1.2. The meaning of tax planning, abusive tax planning and aggressive tax planning in the French legal system

Tax planning (optimisation fiscale) has for long been considered as legitimate.

Indeed a principle exists in France according to which the tax payer is not obliged to choose the most onerous way from a tax point of view to run his business and perform operations. This principle is said30 to be deriving from the one stating that the tax authorities should not interfere with the management of the business by the taxpayer (principe de non-immixtion). The doctrine is unanimous on its existence31, despite of the fact that it is not enshrined in a provision of the French tax code.

It was clearly stated in the answer from the Minister to the National Assembly: “Facing two legal techniques which results are identical, it is lawful to operate a choice based on tax reason” 32. At one point in time, the FTA did expressly share this view in the administrative guidelines relying, to that end, on the Conseil d’Etat case law33.

26 The Conseil constitutionnel sometimes referred to the objective of “fighting tax evasion and tax avoidance”, see for example FR: Cons. const., 17 Sept. 2015, n. 2015-481 QPC, Époux B. (Amende pour défaut de déclaration de comptes bancaires ouverts, utilisés ou clos à l'étranger), para. 5. 27 FR: Cons. const., 26 June 2015, n. 2015-473 QPC, Époux P. (Imposition des dividendes au barème de l'impôt sur le revenu - Conditions d'application de l'abattement forfaitaire), para. 5. 28 FR: Assemblée Nationale, report n. 1243 Rapport d’information déposé en application de l’article 145 du règlement par la commission des finances, de l’économie générale et du contrôle budgétaire en conclusion des travaux d’une mission d’information sur l’optimisation fiscale des entreprises dans un contexte international (2013), available at http://www.assemblee-nationale.fr/14/pdf/rap-info/i1243.pdf (accessed 1 Feb. 2016). 29 FR: Conseil des prélèvements obligatoires, La fraude aux prélèvements obligatoires et son contrôle (La Documentation française, 2007), available at http://www.ladocumentationfrancaise.fr/var/storage/rapports- publics/074000186.pdf (accessed 1 Feb. 2016). 30 P. Serlooten, Droit fiscal des affaires, 14th ed., para. 24. (Dalloz 2015). 31 Serlooten, supra n. 30, at para. 24; M. Cozian & F. Deboissy, Précis de fiscalité des entreprises, 38th ed., paras. 226-228 and 2157 (LexisNexis 2015); Delaunay, supra n. 12, at para. 1 ; R. Mortier, La donation avant cession in extenso, Dr. fisc. 2014, n. 39, 540; D. Gutmann, Droit fiscal des affaires, 5th ed., para. 630 (Lextenso 2014). 32 FR: Rép. min. n. 10603, JOAN Q 25 Apr. 1970, quoted by F. Deboissy, L’opposabilité à l’administration fiscale des montages contractuels, RDC 2007, p. 1006, para. 3; FR: Rép. min. n. 15603, JOAN Q 20 Mar. 1971, quoted by P. Serlooten, Liberté de gestion et droit fiscal : la réalité et le renouvellement de l’encadrement de la liberté, Dr. fisc. 2007, n. 12, 301. In a topical case34, the Conseil d’Etat implicitly relies on this principle. A parent company had a subsidiary which faced financial difficulties. The parent did not have more choice: it could either liquidate its subsidiary or try to rescue it. For the latter option it could either grant a loan, inject new funds through a capital increase or grant a financial subsidy and/or proceed to a debt waiver.

The tax consequences of those alternatives were very different: the loan or the capital increase was not deductible from the taxable results were the subsidy/debt waiver were. The FTA considered that the parent chose the latter only for tax reason and that there was an abuse of law. The Conseil d’Etat considered that helping its subsidiary was in the parent own interest and that it acted in a normal way when it granted the subsidy and debt waiver “even if it could have used other means”.

As Cozian put it “We cannot find better hymn to the freedom nor pronounce a better eulogy to cleverness. Unfortunately, if tax cleverness is a virtue, excess of cleverness is a sin.”35

This “freedom to choose the less taxed way” is also recognized by the Cour of Cassation 36 and by the Conseil constitutionnel. On 29 December 2013, the latter issued an important decision on tax planning and also, as we will analyse later, on abuse of law37. Was at stake the Finance bill for 2014 that was introducing and obligation to disclose tax planning scheme (schéma d’optimisation fiscale). The obligation was lying on the tax advisors and/or on the companies inventing and implementing such scheme. They were defined as “any combination of process and legal tax accounting or financial instruments: whose principal object is to reduce the tax burden of a taxpayer, to postpone the liability or the payment or to obtain the reimbursement of tax or contribution; and that is fulfilling criteria provided for” in a special decree to be adopted. Absent disclosure, the sanction was a fine equal to 5% of the fees of the tax advisors or in case of “home-made scheme” 5% of the tax advantage for the companies.

This provision was considered to be unconstitutional as it was infringing the freedom of enterprise 38 and especially the one of tax advisors. Indeed, the Court considered, looking at the sanction, that the legislator who has the Constitutional duty to adopt tax legislation39, which should be accessible and understandable, should precisely define the terms of such an obligation. 33 FR: DGI, doc. adm., 13 L153120, 1 July 2002, para. 20 “Dans certains cas, les contribuables ont la possibilité de choisir entre plusieurs solutions pour réaliser une opération déterminée. Le fait qu'ils optent pour la solution la plus avantageuse au plan fiscal ne permet pas de conclure à l'abus de droit s'il apparaît que les actes juridiques sur lesquels repose cette solution sont conformes à la réalité (CE, arrêt du 16 juin 1976, req. n° 95513).” Distinguished authors rely also on this case law, see for instance Mortier (2014, para. 15). 34 FR: CE, 27 June 1984, n. 35030, RJF 8-9/84, n. 937. This judgment has also been published in Revue de droit fiscal (Dr. fisc. 1985, n. 22-23, comm. 1063) accompanied by the conclusions of Advocate General (rapporteur public) M.-A. Latournerie. 35 M. Cozian, Éloge de l'habileté fiscale, RFP 2006, alerte 1. 36 FR: Cass., 7 Mar. 1984, n. 81-13728 and 81-16259. 37 FR: Cons. const., 29 Dec. 2013, n. 2013-685 DC, Loi de finances pour 2014. 38 See for a definition FR: Cons. const., 22 May 2015, n. 2015-468/469/472 QPC, Société UBER France SAS et autre [Voitures de transport avec chauffeur - Interdiction de la « maraude électronique » - Modalités de tarification - Obligation de retour à la base], para 4. (“Considering that pursuant to Article 4 of the 1789 Declaration: ‘Freedom consists in the ability to do anything which doesn't harm anyone; hence the exercise of each man's natural rights has no limits except those which guarantee the enjoyment of the same rights to other members of society. These limits can only be determined by law’; considering that the legislator is free to subject the freedom of enterprise, as resulting from Article 4 of the 1789 Declaration, to limitations associated with constitutional requirements or which are justified by general interest, provided that this does not result in any harm that is disproportionate to the objective pursued”). The “Commentary” of this decision – which is published by the Conseil constitutionnel itself and is generally considered as an explanation of the decision – clearly states that “Any taxpayer can legitimately look for reducing its tax burden and any tax lawyer can look for reducing the tax burden of its clients, without this leading to constitute a fraud.”40

In the same bill the legislator did adopt a provision that obliges to include an Annex in the Finance bill that is providing some information and notably the 20 most important reassessment of individuals for fraud and “international abusive tax planning”, making those terms a legal notion although undefined41.

Finally, the members of Parliament – in their submission to the Conseil constitutionnel to denounce the unconstitutionality of a another provision of the bill – raised that article 2 of the French Declaration of Human and Civil Rights which guarantees “the freedom for the taxpayer to choose, for a given operation, the tax way that is the less onerous.” 42 The Conseil constitutionnel, however, did not rely upon it.

Before this decision, the Conseil constitutionnel already rendered an important decision concerning tax incentives voluntarily introduced by the legislator which were part of an overall system which became so complex that some taxpayers would not be able to make tax arbitrage which was contrary to the equality before tax law43. Doctrine considered it to be the recognition of this freedom44.

With respect to tax ruling or pre-authorization request, we believe that if they could be used to implement an optimization the French tax authorities will certainly not validate aggressive tax planning that would qualify as an abuse of law or in the case or intra-group reorganization, for instance, would lead to deprive France of its right to tax.

There is no clear distinction in French tax law between tax planning and aggressive or abusive tax planning. Those may be considered to some instance as legal concept since they are use in the Code général des impôts but are largely imprecise and are very subjective elements. To illustrate that, one would refer to a recent a parliamentary report where the notion of “tax optimization” has been negatively described and was pointed out as a breach of the equality before tax principle 45, this is to say that what has always been considered as lawful is now described in the same way than tax evasion was when it was banned!

1.3. Conclusion

39 Under Article 34 of the Constitution, “Statutes shall determine the rules concerning: - the base, rates and methods of collection of all types of taxes”. 40 Available at http://www.conseil-constitutionnel.fr/conseil- constitutionnel/root/bank/download/2013685DCccc_684_685dc.pdf (accessed 1 Feb. 2016). 41 FR: Loi de finances pour 2014, 29 Dec. 2013, n. 2013-1278, art. 103. 42 2013-685 DC (29 Dec. 2013), para. 113. However the Conseil constitutionnel did not mention this as a ground for its decision. 43 FR: Cons. const., 29 Dec. 2005, n. 2005-530 DC, Loi de finances pour 2006, para. 61 et seq. 44 G. Blanluet, S. Austry and L. Ayrault, Encadrement de la lutte contre la fraude et l’évasion fiscale, Dr. fisc. 2015, n. 39, 582. 45 Assemblée Nationale, supra n. 28, at p. 24. To summarize, it seems that, at least in the French context it is not necessary to have a full range of terms to define similar concepts. It would be sufficient, in the light of the definitions given in the introduction to establish a distinction between: - tax fraud which is sanctioned by criminal law; - tax evasion which is sanctioned by a fine under the procedure and guarantees of the Livre des procédures fiscales and the Code général des impôts, either under a GAAR or a SAAR; and - tax optimization which is allowed.

Indeed, it seems confusing to use the terms “avoidance” that could be legal and illegal. Beside, as we will see in the second part, when the OECD and the IBFD define tax avoidance as a practice that follow a literal interpretation of the law but goes against the intent of the author, it lays down one of the criteria of the French abuse of law theory that falls under the tax evasion category. Other concepts such as “aggressive” or “abusive tax planning” are, we believe, not necessary and probably counter-productive since it gives the impression that they are many different legal qualifications, and brings confusion.

It must be stressed however that even if this reduced number of qualifications the dividing line between those behaviour is unclear.

First, “tax fraud” and “evasion” are not exclusive one from the other. A scheme may fall into those two qualifications. In France, it has been stressed that tax fraud procedure is now used by French tax authorities as a deterrent to tax evasion46.

Second, it is often difficult to clearly identify the red line between what is legitimate tax optimization and what is tax evasion, at least when no SAARs are “fixing” the limit. However, when it comes to GAARs and especially the prohibition of abuse of law rule, legal certainty is difficult to ascertain.

In the end, the situation in France is quite similar than the one described by the OECD where it stated “Considering the difficulties in precisely identifying the dividing line between what it is aggressive and what is not, domestic and treaty-based anti-avoidance provisions constitute the benchmark against which to decide whether a given strategy should be implemented (from the perspective of the taxpayer) or should be challenged (from the perspective of the revenue authorities)” 47.

2. The French reaction to avoidance and aggressive tax planning in the BEPS context

2.1. Presentation of French GAARs

46 F. Deboissy, Abus de droit : quel est le risqué pénal?, Dr. fisc. 2014, n. 46, 623. 47 OECD, Addressing Base Erosion and Profit Shifting, p. 43 (OECD Publishing 2013), International Organizations’ Documentation IBFD. As mentioned above tax optimization is, in France, lawful but this does not mean that any tax scheme aiming at reducing taxpayers’ tax liability or at taking “advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability”48 is allowed. French tax law provide the tax authorities with several tools to limit taxpayers’ “creativeness”.

First, there is tax fraud which, as mention above, is a criminal offense and with which we will not deal in this report. Second there are two GAARs. Absent definitions of “tax evasion”, “tax avoidance” and “tax planning”, the boundaries between legal and illegal tax planning is drawn by those GAARs (unless a SAAR would be applicable).

The first GAAR is the abnormal act of management theory 49. It is a pretorian creation relying on general principles of French tax law. According to it, “corporate income tax is assessed on taxable profit arising from all operations realized by a company, except those which, with respect to its object or its modalities, are not linked to a normal commercial management” 50. For the purpose of this article, one can only refer to this concept where it addresses acts not performed in the interest of the company51: - because expenses incurred by the company are not to the benefit of the company, i.e. they are not linked to the generation of profits52, or are too high; or - because the company has renounced to income53 (for example, when it does not invoice a service or a good or if it does so below the market price).

The second GAAR, which appears to be more relevant within the scope of this article is the prohibition of abuse of tax law (abus de droit fiscal) which is at the origin a pretorian creation now codified in article L64 of the LPF. A special procedure exist, if the taxpayer disagrees with the tax reassessment, it can require a special committee (Comité de l’abus de droit) to analyse its case. This is also open to the tax authority which is in any case not bound by this body’s consultative opinion but have to bear the burden of proof if they do not follow it. The sanction attached to the abuse of tax law are heavy, since the FTA is entitled to reassess the tax which was avoided, plus a late payment interest of 4.80% per year, plus a penalty amounting to up to 80% of the avoided tax 54.

2.1.1. Focus on the” abuse of tax law”

48 EC Recommendation on aggressive tax planning: Commission Recommendation 2012/772/EU of 6 December 2012 on aggressive tax planning, recital 2, OJ L338 (2012). 49 This rule is often considered as fighting against tax evasion, see for instance: Delaunay, supra n. 12, at para. 7; Assemblée Nationale, supra n. 28, at p. 83; B. Gouthière, Les impôts dans les affaires internationales, 10th ed., para. 71800 and 72520 et seq. (Francis Lefebvre 2014). 50 FR: CE, 6 Mar. 2006, n. 281034, Société Disvalor and CE, 30 June 2008, n. 291710, Société civile du groupe Comte. Those cases are quoted by Daniel Gutmann to define the abnormal act of management (Gutmann 2014, n. 631). 51 We set aside, the act of management which is abnormal since it may be considered as a fault in the management of the company, especially because the risk run by the entrepreneur is too high, or because there is a default of control of the operations by the management. 52 See P. Serlooten, Liberté de gestion et droit fiscal : la réalité et le renouvellement de l’encadrement de la liberté, Dr. fisc. 2007, n. 12, 301, para. 32. 53 In this meaning, it is close to transfer pricing rules. 54 This penalty could be reduced to 40% if impugned transactions or acts have not been performed on the main initiative of the taxpayer (i.e. passive role), or if the latter has not been the main beneficiary of the transaction. The French provision prohibiting the abus de droit fiscal could be said to be closed to the one proposed by point 4.2. of the EC Recommendation on aggressive tax planning (2012/772) 55. Indeed, the latter seems similar to the notion of “abuse of law” that has been built in by the ECJ and there are strong ties with the French one.

Looking at the history of the abuse of law theory in tax matters, one would notice that it has been built by the judicial judge in capital/stamp duty matters in order to set aside acts that were abusing the law by simulation56. Later, it was introduced by the legislator in the Code général des impôts but only to prevent simulation for specific taxes.

In 1981, the Conseil d’Etat interpreted the provision prohibiting the abuse of law as also prohibiting what would be call fraud legis57 extending it to cover and set aside acts that “could not have been inspired by any other purpose than that of avoiding or reducing the tax liability which, if these instruments had not been concluded, the taxpayer would normally have borne with respect of his actual situation and real activities”58. In 1988, the Cour de cassation did the same59.

However, the question remained as to whether or not there was a general principle prohibiting fraus legis absent a special provision of the law. In other words, should one be in the scope of the French abuse of law provision in order to be within the scope of the fraus legis theory. It is worth underlying that in other public law area this concept was clearly recognized absent a specific provision prohibiting it. In the Janfin case, the question was clearly raised. If one look at the opinion of the Advocate General in the Halifax case60, from the ECJ, was clearly taken into account. Indeed, the ECJ ruled that abuse of law could be considered as prohibited along the same reasoning than the one of the Conseil d’Etat when it developed the fraude à la loi theory. The Advocate General then wondered himself that if for instance VAT would not be included within the scope of the French provision prohibiting abuse of law, would this means that fraude à la loi in VAT matters could not be challenged in France? This was in the Advocate General opinion doubtful. The Conseil d’Etat clearly affirmed that: the tax authorities can rely on the fraus legis principle to set aside act “seeking the benefit of a literal application of texts or decisions against the objectives sought by their authors, could not have been inspired by any other purpose than that of avoiding or reducing the tax liability which, if these instruments had not been concluded, the taxpayer would normally have borne with respect of his actual situation and real activities”61 (emphasis added).

55 It is defined as: “An artificial arrangement or an artificial series of arrangements which has been put into place for the essential purpose of avoiding taxation and leads to a tax benefit shall be ignored. National authorities shall treat these arrangements for tax purposes by reference to their economic substance”. 56 See FR: Cass., 20 Aug. 1867, Legrand. The case was quoted by Advocate General Laurent Olléon in his opinion in Janfin (L. Olléon, L'administration peut-elle poursuivre la répression des abus de droit en dehors du champ d'application de l'article L 64 du LPF ?, BDCF 2006, n. 156) and by Christophe de La Mardière (JCl. Procédures fiscales, Fasc. 375, by C. de La Mardière, para. 14). Laurent Olléon noted that the Conseil d’Etat did the same in a latter decision (FR: CE, 12 Dec. 1930, Société X a – available at http://gallica.bnf.fr/ark:/12148/bpt6k5744066s/f1068.item.r=12%20decembre; accessed 1 Feb. 2016). 57 Before, abuse of law could not apply if no fictitious act existed. The Conseil d’Etat, sitting as fiscal plenary session, introduced the fraude à la loi concept in the case n. 19079 (10 June 1981). 58 FR: CE, 27 Sept. 2006, n. 260050, Janfin. This case law has been then codified in the Livre des procédures fiscales. 59 FR: Cass, 19 Apr. 1988, n. 86-19079, Donizel. 60 UK: ECJ, 21 Feb. 2006, Case C-255/02, Halifax plc, Leeds Permanent Development Services Ltd and County Wide Property Investments Ltd v Commissioners of Customs & Excise, ECJ Case Law IBFD. 61 See Janfin (2006). This has been codified in the French tax code after. The emphasis we added shows a new element in the definition of the fraude à la loi which has been imported from the EU notion. According to authorized commentators 62, this solution was clearly the result of the influence of the EU abuse of law theory built by the Court in Halifax but also in Emsland- Stärke63 and Cadbury Schweppes64.

Finally, in Persicot65, the Conseil d’Etat aligned its interpretation with respect to situations cover by article L64 of the LPF on the wording of the Janfin case.

Interestingly and in order to improve legal certainty, those developments were codified in article L64 of the LPF which now provides that:

“In order to restore the true character, the tax administration is entitled to discard, as act not being able to be opposed, the acts constituting an abuse of rights, whether those acts have a fictitious character, or which seeking the benefit of a literal application of texts or decisions against the objectives sought by their authors, could not have been inspired by any other purpose than that of avoiding or reducing the tax liability which, if these instruments had not been concluded, the taxpayer would normally have borne with respect of his actual situation and real activities”66.

As a result, the abuse of law has two aspects: - prohibition of simulation, acts that are fictitious; and - prohibition of fraus legis, acts that pursue a tax purpose, two elements have then to be characterized: the exclusive tax aim of the act/transaction and the search of the benefit of a literal application of the law against the intent of their authors.

It derives from the above that there has most probably been a reciprocal influence between French and EU laws that leads to the definition of abuse of law. The influence of the ECJ case law probably influenced and will now be influencing the interpretation and application of this notion.

2.1.2. Compatibility of the French abuse of law provision with EU law

The French theory of abuse of law has evolved under the influence of EU abuse of law theory. This is not the sole impact that EU law had, one would note that in many circumstances, when the judges

62 O. Fouquet, Interprétation française et interprétation européenne de l’abus de droit, RJF 5/06, p. 383 and seq.; J.-M. Sauvé, Allocation d’ouverture des Entretiens du Palais-Royal, Dr. fisc. 2007, n. 47, 976. 63 DE: ECJ, 14 Dec. 2000, Case C-110/99, Emsland-Stärke GmbH v Hauptzollamt Hamburg-Jonas, ECJ Case Law IBFD. 64 UK: ECJ, 12 Sept. 2006, Case C-196/04, Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, ECJ Case Law IBFD. 65 FR : CE, 28 Feb. 2007, n. 284565, Marius Persicot. 66 Free translation of article L64 of the LPF. In French: “Afin d'en restituer le véritable caractère, l'administration est en droit d'écarter, comme ne lui étant pas opposables, les actes constitutifs d'un abus de droit, soit que ces actes ont un caractère fictif, soit que, textes ou de décisions à l'encontre des objectifs poursuivis par leurs auteurs, ils n'ont pu être inspirés par aucun autre motif que celui d'éluder ou d'atténuer les charges fiscales que l'intéressé, si ces actes n'avaient pas été passés ou réalisés, aurait normalement supportées eu égard à sa situation ou à ses activités réelles”. developed or applied the abuse of law doctrine it had implicitly or explicitly to take into account EU law in order to avoid conflicts.

In the Sagal decision67 the Conseil d’Etat had the opportunity to clearly link article L64 of the LPF and the ECJ’s jurisprudence and to rule that it was compatible with EU law.

In this case, a company together with five others had bought one sixth of the share capital of a Luxembourg company which was a holding company enjoying for dividends and capital gains an exemption regime. The French company could enjoy the participation exemption regime on dividends paid by the Luxembourg company. The tax authorities considered that the scheme was abusive within the meaning of article L64 of the LPF in its fraud of law branch.

The Conseil d’Etat considered that the company had no substance since: - the Luxembourg company was under the dependence of the bank that created it for its management and for its investment; - its assets were composed of shares; - the Luxembourg company had no technical competence for realizing the investment; and - its shareholder did not participate to shareholders meeting.

The Conseil d’Etat underlined that the Luxembourg company was not paying any corporate income tax and the shareholder’s participation allowed it to benefit from the parent subsidiary regime but to avoid the application of the French CFC rules.

The taxpayer mentioned that the scheme could allow realizing economies of scale together with allowing an optimization of the return on investment. However, it could not establish that this was linked to the establishment of the subsidiary abroad instead than in France.

The Conseil d’Etat concluded that the arrangement to acquire a stake in a Luxembourg company with no substance for the sole purpose of avoiding tax was an abuse of law. This interpretation of article L64 of the LPF was, according to the taxpayer, infringing the freedom establishment. The Conseil d’Etat noted that article L64 of the LPF objectives consist specifically in excluding from the benefit of tax advantage “purely artificial arrangement whose sole objective is to circumvent French tax law” 68 and it cannot therefore infringes EU law.

It is clear from the Advocate General’s opinion69 that the abuse of law was not characterized only due to the location of the subsidiary in Luxembourg that was leading to benefit from tax advantages but mainly to the set up of an artificial ad hoc structure without any substance nor existence or autonomous justification with the sole aim of benefiting from the French participation exemption regime (aiming at avoiding double taxation) and from the Luxembourg exemption leading to the result that the profits are not taxed anywhere. He found that article L64 of the LPF is compatible with

67 FR: CE, 18 May 2005, n. 267087, Société Sagal. See also Pléiade (FR: CE, 18 Feb. 2004, n. 247729, SA Pléiade) case which appears however for the purpose of this article less relevant. 68 Société Sagal (2005). 69 P. Collin, La prise de participation sans justification économique ou financière dans une société holding luxembourgeoise exonérée d’impôt et dépourvue de toute substance caractérise-t-elle un abus de droit (suite)?, BDCF 2005, n. 110. EU law which allows applying legislation aiming at fighting abuse as was the case in Lasteyrie du Sailant70.

An authorized commentator, President of the financial section of the Conseil d’Etat at that time, mentioned the clear convergence of the French and EU abuse of law concept stating that the “key to distinguish between abusive scheme and tax optimization scheme which cannot be criticized lies in the artificial character of the scheme, character which itself depends on the substance of the scheme”71. It should be added that the artificial character of the arrangement lies not in the use of “subsidiary lacking legal substance but lacking economic substance”72 (emphasis added).

Some years later, the Conseil d’Etat followed the same line of reasoning in the Alcatel CIT decision73.

The French tax authorities considered that a French company, part of a French group, committed an abuse of law by subscribing to the capital increase of a Belgian related company, benefiting from the preferential regime of coordination centres74, the funds being on lend intra-group.

The administrative court of appeal found that the Belgian company realized an important turnover, had effectively exercised its function as a financing centre for the group and the management of foreign exchange risk for the whole group and had 48 employees to decide that the capital increase could not be considered as realized for the “sole purpose of avoiding taxation”75.

According to the Court, the fact that the activity could have been performed in France with the same results – regarding the return on investment – did not change the conclusion. In other words, the circumstances that the interests were not taxed in Belgium and that the returns benefitted in France from the parent subsidiary regime were not relevant.

The Conseil d’Etat then confirmed that the Court did apply correctly the law (bearing in mind that its control of the appreciation of the facts by the Court is limited). The Advocate General explicitly mentioned that the “choice of the most advantageous location within the EU… correspond to a legitimate tax optimization aim without the red line of abuse of law being crossed”. 76 Interestingly, looking at whether or not the location in Belgium could be considered as an objective contrary to the author of the legislation, the Advocate General considered that from an EU law standpoint this approach would not be acceptable. It pointed out that the ECJ recognized that abuse could be fight but only provided one faces a purely artificial arrangement aiming at avoiding national tax, which based on the substance identified in this case would not be characterized. According to an authorized commentator, this court case demonstrates that the localization of the subsidiary in 70 FR: ECJ, 11 Mar. 2004, Case C-9/02, Hughes de Lasteyrie du Saillant v Ministère de l'Économie, des Finances et de l'Industrie, ECJ Case Law IBFD. 71 Fouquet, supra n. 63, at p. 384. 72 E. Bokdam-Tognetti, Régime des sociétés mères et abus de droit : de l'arrêt Sté Pléiade à l'arrêt Groupement charbonnier Montdiderien, retour sur dix ans de jurisprudence du Conseil d'État, Dr. fisc. 2014, n. 41, 566, para. 2. 73 FR: CE, 15 Apr. 2011, n. 322610, Société Alcatel CIT. 74 For a description of the regime, see the ECJ case Forum 187 ABSL (Joined cases C-182/03 and C-217/03). 75 Société Alcatel CIT (2011). 76 P. Collin, Une société mère, en souscrivant à l'augmentation du capital d'une société belge bénéficiant du régime fiscal privilégié de « centre de coordination » et en recevant de sa filiale des dividendes bénéficiant du régime des sociétés mères, a-t-elle commis un abus de droit ?, BDCF 2011, n. 91. another country is not “an autonomous and sufficient sequence to characterize the exclusive tax motive”77.

More recently, the Conseil d’Etat had to rule in a case78 that was, according to the same author, between the Pléiade and the Alcatel CIT cases79. In a nutshell, a French company borrowed some funds from a related company (that had issued bonds) and used those funds to subscribe 99.9% of the shares in a Dutch company, the later bought US bonds from an unrelated party. In order to decide that the Dutch company had been created for exclusive tax reason, this is to say to benefit from the parent subsidiary regime on income that would have been fully taxable should this subsidiary not had been interposed, the administrative court of appeal had considered that the tax authorities brought the proof of “absence of economic substance” of the company by showing that: - the sole activity was to manage the funds brought by its parent and the only profits were interest and capital gains; - the investment policy had been defined “once for all” when the subsidiary had been created; - the parent did not control the “management” of this subsidiary; and - the risk was not distinguished from the one the parent would have born should it has invested directly compared to the investment through the subsidiary.

The Conseil d’Etat considered that the appreciation of the court was correct. As the Advocate General underlines “by evoking the absence of real control of the management of the company, the court seems to refer not to the absence of participation in the general assembly or the supervision body of the company which was contested by the plaintiff, but to the fact that the automatic pilot of the structure whose investment policy… was decided ab initio, had for consequences the absence of real implication by the parent.”80 This seems to be endorsed by the Conseil d’Etat. It must be stressed that the company did not brought any non-tax reason for the setting up of the company.

Interestingly in the same case the Conseil d’Etat considered that there was no abuse for the company to request the benefit of the tax credit (avoir fiscal) allowing the elimination of double taxation – in an EU context thanks to the Accor case81 – in the extent that the company did not seek a literal application of the law against the intent of its authors.

In the author view, the faith of the French abuse of law doctrine is now clearly linked to the EU abuse of law. Whether or not the French concept is completely in line with the EU abuse of law pretorian definition is, in the author view, highly debatable82. However, one would stress that there seems to be a difference between the French and the EU abuse of law theory since the former applies an exclusive tax purpose test and the latter a principal tax purposes test.

2.1.3. Sole purpose vs principal purpose

77 Bokdam-Tognetti, supra n. 74, at para. 3. 78 FR: CE, 11 May 2015, n. 365564, Société Natixis. 79 Bokdam-Tognetti, supra n. 74, at para. 3. 80 E. Bokdam-Tognetti, Abus de droit et fraude à la loi : comment apprécier la présence ou l'absence de substance économique d'une société interposée pour les besoin d'un montage ?, BDCF 2015, n. 109. 81 FR: ECJ, 15 Sept. 2011, Case C-310/09, Ministre du Budget, des Comptes publics et de la Fonction publique v Accor SA, ECJ Case Law IBFD. 82 Especially if one compares WebMindLicenses (C-419/14) case and the French Andros (FR: CE, 10 Dec. 2008, n. 295977, Société Andros), Alcatel CIT (2011) and Natixis (2015) cases. What should be the ground for triggering the GAAR: should the taxpayer solely aimed at obtaining a tax advantage or should it be sufficient that it would be its sole purpose.

In 2014, a reform of article L64 of the Livre des procédures fiscales was launched in order to substitute the exclusive purpose test by a principal purposes test. Indeed some report pointed out that the exclusive purpose test would be too easy to circumvent by finding an economic or financial advantage, even where it would be small83, to justify the operation.

Therefore the proposed Finance bill for 2014 contained such modification. However, the Conseil constitutionnel considered that this test would be unconstitutional because it would grant an “important margin of appreciation to the tax authorities” and taking into account the important sanction attached to the abuse of law, this triggers the constitutional control applicable to the constitutional principle of legality of offences, the latter obliging the legislator to precisely define the criteria to be applied84.

Interestingly the own commentary of this decision by the Conseil constitutionnel notes that the Conseil d’Etat already considered that if the tax advantage is predominant compare to the economic advantage, then it could be concluded that the taxpayer behaviour had been inspired by an exclusive tax motive85. It is indeed true that in the famous Garnier-Choiseul case86 where a taxpayer had set up a scheme qualified as abusive by the tax authorities, the Conseil d’Etat disregarded the taxpayer argument stating that the company obtained a financial advantage together with the tax one.

Indeed the financial was – in absolute and relative terms – negligible which leads to conclude that the scheme was inspired by an exclusive tax motive87. Interestingly, an authorized commentator, has considered that the Conseil d’Etat could be seen as having distinguished the aim of the scheme from its effect88.

The commentary also refers to the case law of the ECJ and states that the Luxembourg Court also applies an exclusive motive test (referring inter alia to Halifax). However, the ECJ case law on this

83 Assemblée Nationale, supra n. 28, at p. 82-83. 84 2013-685 DC (29 Dec. 2013), para. 112-119. 85 See supra n. 40. 86 FR: CE, 17 July 2013, n. 356523, SARL Garnier Choiseul Holding. In this case the scheme at stake consists in buying shares of a company that has no activity anymore and has sold all its assets. Only cash is remaining in the company and the latter is distributed to the parent which enjoys the participation exemption regime. This leads to recognize a depreciation of the shares which was at that time deductible from the taxable result of the company, leading to the recognition of a loss. Sometimes after two years the shares were sold again to the shareholder crystalizing the tax loss. 87 The AG had the same opinion based on FR: CE, 10 Nov. 1993, n. 62445 Gianoli. In Groupement Charbonier case (FR: 23 June 2014, n. 360708, Société Groupement Charbonnier Montdiderien) the financial gain was more important but the Conseil d’Etat considered that the financial gain was only due to the sharing of the tax gain between the seller and the acquirer of shares. 88 Bokdam-Tognetti, supra n. 74, at para 4. point is not clear89. Recently, the ECJ looked if the “essential aim of the transactions concerned is solely to obtain that tax advantage“90.

In this context, the implementation of the Parent Subsidiary Directive GAAR 91 within French tax law was awaited.

The said GAAR provides that “Member States shall not grant the benefits of this directive to an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of this directive, are not genuine having regard to all relevant facts and circumstances” (emphasis added).

It has been implemented as such and covers all situations where the parent subsidiary regime applies, i.e. domestic, EU and third country situations. The Conseil constitutionnel, in a decision dated on 29 December 2015, considered that the rule defines the tax base of corporate income tax and is not triggering a sanction that could be characterized as a punishment. As a result, it could not be seen as unconstitutional92. Several concepts now co-exist in French tax law and it would be interesting to see the evolution of the French tax authorities practices… Our question, which could be considered as a leitmotiv, is even more relevant in the context of the participation exemption regime: what is the dividing line between tax evasion and tax optimization?

2.2. The French implementation of the EC Recommendation on aggressive tax planning subject-to-tax rule

EC Recommendation on aggressive tax planning (2012/772) proposes to EU Member States to adopt and introduce in their tax treaties a subject-to-tax rule aimed to deal with double non-taxation.

The OECD proposes as part of its anti-BEPS package some measures. Action 6 proposes as a minimum standard the following: - introduce an express statement that the treaty aims at the “elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non- taxation or reduced taxation through tax evasion or avoidance (including through treaty- shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third States)”93; and - introduce (i) a limitation-on-benefits rule (LoB) and a principal purposes test rule (PPT), (ii) a PPT rule alone or (ii) a LoB rule and an anti-conduit rule94.

89 See for example IT: ECJ, 22 May 2008, Case C-162/07, Ampliscientifica Srl and Amplifin SpA v Ministero dell’Economia e delle Finanze and Agenzia delle Entrate, ECJ Case Law IBFD, para. 27 and 28; and UK: ECJ, 20 June 2013, Case C-653/11, Her Majesty’s Commissioners of Revenue and Customs v Paul Newey, ECJ Case Law IBFD, para. 46 and 52. 90 WebMindLicenses (C-419/14), para. 42. 91 Council Directive (EU) 2015/121 of 27 January 2015 amending Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, OJ L21 (2015), EU Law IBFD. 92 FR: Cons. const., 29 Dec. 2015, n. 2015-726 DC, Loi de finances rectificative pour 2015, para. 2-14. 93 OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 - 2015 Final Report, para. 72 (OECD Publishing 2015), International Organizations’ Documentation IBFD. 94 Idem. France does not introduce such a subject-to-tax rule in all its tax treaties. At this stage, to the best of our knowledge, the FTA did not publicly announced that it would adopt such a treaty policy.

However, the Conseil d’Etat recently interpreted the DTT residence provision and the meaning of being “liable to tax” (assujetti à l’impôt) for companies.

In two decisions95, the Conseil d’Etat interpreting the provision in the light of “the principal object of tax treaties which is to avoid double taxation” decided that persons who are not subject to tax due to their “status or activity” are not liable to tax under this provision. As a result a German and a Spanish pension funds could not benefit for the withholding tax rate of the convention.

It is not the purpose of this article to discuss the merit of this decision, which has been heavily criticized96, but we would like to stress that this solution is probably less general than it could appear. For instance, and this is supported by the AG opinion97, companies enjoying tax holidays or loss making company may not automatically fall within such a rule. The same is true when a company would not pay taxes in its residence state due to the territoriality principle or the application of the participation exemption regime.

We believe that France will not adopt the principle set in this recommendation. However, it has necessarily agreed to apply the OECD minimum standard and the BEPS Directive is certainly relevant.

3. Transfer pricing rules, GAARs, specific anti-avoidance rules (SAARs) and linking rules

3.1 Transfer pricing (“TP”) rules and fight against avoidance

Article 57 of the Code général des impôts can be considered as a SAAR used by the FTA in order to fight strategy of minimization of the tax burden in France. For instance, it is used to try to counter business reorganization when companies are relocating functions and assets in another country.

Absent any provision specifically addressing transfer/relocation of activity, FTA tried to reassess those restructuring by considering that there has been a free transfer of intangible (e.g. clients) to reassess companies98.

There are more and more litigations about transfer pricing but this can still be considered as residual compared to the number of reassessment on this ground.

3.2. LoB in French tax treaty practice

95 FR: CE, 9 Nov. 2015, n. 370054, Landesärztekammer Hessen Versorgungswerk (LHV); and FR: CE, 9 Nov. 2015, n. 371132, Société Santander Pensiones SA EGFP. 96 M. Pelletier, La notion de résident dans les conventions fiscales : le Conseil d'État à contre-sens, Dr. fisc. 2015, n. 49, act. 664. 97 Advocate General’s opinion has not yet been published. 98 FR: CAA Paris, 5 Feb. 2013, n. 11PA02914, Société Nestlé Finance International Ltd ; and FR : DGFiP, Délocalisation de profits dans un pays où ils sont soumis à une fiscalité plus favorable dans le cadre d'une restructuration (April 2015), available at http://www.economie.gouv.fr/files/files/directions_services/dgfip/controle_fiscal/montages_abusifs/Fiche_3_Del ocalisation_de_profits_suite_a_restructuration.pdf (accessed 1 Feb. 2016). The term “LoB” often refers to the provision contained in the US treaties which contain a lot of test to define qualified persons that can enjoy treaty benefit. Taking a broader view, we also included provisions implementing a PPT rule.

The LoB proposed by the OECD in Action 6 takes into account three elements to determine whether or not there is a “sufficient link between the entity and its State of residence”99 : - legal nature (i.e. under paragraph 2 some persons that can be considered as qualified person); - ownership (especially under subparagraph 2 c) requiring shareholders to be located in the contracting state and 2 e) and 4 with the derivative benefit clause); and - general activities of the entities (under paragraph 3).

France does not have as a treaty policy to include LoB provision within its bilateral conventions.

In some rare cases, France has introduced them. This is the case in the treaties100 with Japan101, Switzerland102 and United States103 and Cyprus104.

The treaties between France and Japan105 and the United States106 are taking into account the elements identified by the OECD. In these cases it seems quite obvious that France is agreeing to comply with its partners’ treaty policy. The treaty with Switzerland contains only a provision aiming at avoiding conduit arrangement107 entity.

As mentioned above, the OECD also proposes an anti-avoidance rule that is general in nature but specific to treaties, the so-called principal purposes test or PPT. It provides that “a benefit under this Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that

99 OECD, supra n. 95, at p. 9. 100 See Gouthière, supra n. 49, at para. 7485 ; and E. Raingeard de la Blétière & H. Perdriel-Vaissière, French Report, in The impact of the OECD and UN model conventions on bilateral tax treaties, p. [X] (M. Lang et al. eds., Cambridge University Press 2012). 101 Convention between the French Republic and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Tax Evasion and Fraud with Respect to Taxes On Income (together with an Exchange of Letters) [unofficial translation] (3 Mar. 1995), Treaties IBFD [hereafter Fr.-Jap. Income Tax Treaty]. 102 Convention between the French Republic and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes on Income and Capital [unofficial translation] (9 Sept. 1966), Treaties IBFD [hereafter Fr.-Swiss Income and Capital Tax Treaty]. 103 Convention between the Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (31 Aug. 1994), Treaties IBFD [hereafter US-Fr. Income and Capital Tax Treaty]. 104 Convention between the Government of the French Republic and the Government of the Republic of Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital art. 13 (18 Dec. 1981), Treaties IBFD [hereafter Fr.-Cyp. Income and Capital Tax Treaty]. This treaty contains a provision excluding from the benefit of some advantages companies enjoying a preferential regime and being held by a non-resident/non-national. 105 Art. 22A Fr.-Jap. Income Tax Treaty. 106 Art. 30 US-Fr. Income and Capital Tax Treaty. 107 Art. 14 Fr.-Swiss Income and Capital Tax Treaty. benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.”108.

One would recognize elements of the French (and EU) fraus legis which has been already applied in the context of Double tax treaties.

In its treaties, France sometime includes those provisions.

The treaties with Panama109 or Colombia110 are good examples. They both provides that “a resident of a Contracting State may not benefit from any tax reduction or exemption granted by the other Contracting State by virtue of the Convention if the main purpose or one of the main purposes of the conduct of operations by such resident or a person connected to such resident was to obtain the benefits of the Convention.”111

The treaty with China also contains general anti-abuse provisions setting a principal purposes test112.

3.3. French CFC rules

France has Controlled Foreign Company (CFC) rules set in article 209 B of the Code général des impôts. We are following the outline of the OECD report to provide with its key elements113.

Entity definition

Article 209 B of the CGI applies to entity subject to corporate income tax owning a foreign legal entity (in the broad sense, legal person, partnership, trust etc.) or having a permanent establishment.

Control

108 OECD, supra n. 95, at p. 59. 109 Convention between the Government of the French Republic and the Government of the Republic of Panama for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion and Fraud with Respect to Taxes on Income (together with a Protocol) [unofficial translation] (30 June 2011), Treaties IBFD [hereafter Fr.-Pana. Income Tax Treaty]. 110 Convention between the Government of the French Republic and the Government of the Republic of Colombia for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion and Fraud with Respect to Taxes on Income and on Capital [unofficial translation] (25 June 2015.), Treaties IBFD [hereafter Fr.-Colum.. Income and Capital Tax Treaty]. 111 Art. 25(1) Fr.-Pana. Income Tax Treaty and art. 26(1) Fr.-Colum.. Income and Capital Tax Treaty. They also contain several provisions stating that in case a company is not the beneficial owner of an income and this results in a tax advantage a state may deny the application of the treaty. 112 Agreement between the Government of the People’s Republic of China and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income [unofficial translation] art. 10(7), 11(8), 12(7), 22(4) and 24 (26 November 2013), Treaties IBFD [hereafter Fr.-China Income Tax Treaty]. 113 FR: DGFiP, BOI-IS-BASE-60-10-20120912 and seq.; Gouthière, supra n. 49, at para. 73100; Gutmann, supra n. 31, at para. 812 et seq.; J. Benamran, France - Corporate Taxation sec. 10.4., Country Analyses IBFD (accessed 1 Feb. 2016). Article 209 B of the CGI focus on the legal and economic control as it applies when the legal entity holds, directly or indirectly, more than 50% of the shares, financial rights or voting rights of the foreign entity.

An anti-abuse rule is provided for setting the rate at 5%, when 50% of the stake is owned by French companies or by companies being directly or indirectly under the control of the French entity. The control being a legal or de facto one. If the foreign entity is listed, one would apply is if and only if companies are acting in concert.

CFC exemptions and threshold requirements

In order to fall in the scope of article 209 B of the CGI, the foreign entity must be subject to a so called privileged tax regime, that is to say an effective tax rate lower than 50% of what it would have been if the companies had been taxable in France. French CFC rules does not provide for de minimis threshold, but due to the safe harbour, focus on abusive transaction114.

CFC income definition

All income of the CFC is attributed to its parent, in due proportion of its stake in the foreign legal entity. The results of the foreign entity that are taxable in France in the hand of the French company are computed under the French tax rules. Losses of the French company are not offset against French taxable result but can be carried forward against its own profits.

Attribution of income

The income is attributed in proportion of the stake of the French parent in the company.

The result of the foreign entity is deemed distributed and taxed as a deemed dividend115. If the French company owns a permanent establishment it would be taxable on its result as business income.

Rules to prevent double taxation

Double taxation would be eliminated whether it is linked to the corporate income tax paid in the residence country of the CFC or any taxed levied in a source state for income earned by the CFC and taxed in France (pro rata applies should there be several shareholders). Conditions however apply such as the existence of a tax treaty between France and the source state and it is done under the conditions and at the rate set in the later treaty.

Safe harbours

114 See below. 115 Before 2005, profits of affiliates were taxed in the hand of the French resident shareholders. In 2005, new French CFC rules were introduced following the Schneider case (Conseil d’Etat, 28 June 2002, n°232276, Société Schneider Electric) where the Conseil d’Etat ruled that the former rules were incompatible with double tax treaties. Profits of the foreign entity is now deemed to be distributed. Within the European Union, article 209 B of the CGI only applies to artificial arrangement aimed at circumventing French tax law. More generally, it does not apply if the French entity demonstrates that the operations have principally an object and an effect different than the one to localized profits in a country where it is subject to a privileged tax regime. This is for example the case when the company has an effective industrial or commercial activity on the foreign territory.

3.4. Linking rules

France has introduced some kind of linking rules although they differ from the OECD recommendations.

The first one has been introduced before the issuance of the OECD’s BEPS Action 2 final report. It is supposed to be an anti-hybrid instrument rule but does not target conflict of qualification as it applies generally to interest paid by a French company (subject to tax) to a French 116 or a foreign company117 that is, for the current tax year, subject to corporate tax on the interest income at a rate which is less than 25% of the corporate tax that would be due under French tax rules (i.e. 8.6%). When the lender is domiciled or established outside France, one should determine the tax liability that the lender would have had on the interest if it had been in France. According to the tax authorities, one should only look at the statutory rate118, i.e. the rate applicable to the gross product. If the guidelines refer to the calculation of the effective tax rate it seems that it is only to take into account rebate or provision limiting the inclusion of interest in the tax base119.

The second one is the implementation of the Parent Subsidiary Directive special anti-abuse rule 120. Article 145 6 b of the Code général des impôts provides that the exemption does not apply to income received when the distributed income are deductible from the taxable result of the company.

3.5. Interest limitation rules

France has a lot of interest limitations rules: - the abnormal act of management theory could be used to challenge the deductibility; - article 57 of the Code général des impôts setting transfer pricing rule; - article 212 bis of the CGI set a general limitation to the deduction of interest expenses: companies being able to deduct 75% of the total amount of net interest expenses unless this amount is below three million euros;

116 One will hardly find cases where such rule would apply in a domestic situation. This has certainly be provided for to avoid EU criticisms. However such an ”abuse of law“, would probably not succeed. Indeed, the qualification of restriction would be due to the fact that they apply in the ”vast majority of cases“ to cross-border situations (see DE: ECJ 26 Oct. 1999, Case C-294/97, Eurowings Luftverkehrs AG v Finanzamt Dortmund- Unna, ECJ Case Law IBFD; and HU: ECJ, 5 Feb. 2014, Case C-385/12, Hervis Sport- és Divatkereskedelmi Kft. v Nemzeti Adó- és Vámhivatal Közép-dunántúli Regionális Adó Főigazgatósága, ECJ Case Law IBFD). 117 Special rules apply to transparent company. 118 FR: DGFiP, BOI-IS-BASE-35-50-20140805, para. 40. 119 A. Lagarrigue & B. Hardeck, Dispositif anti-hybrides : retour sur les difficultés d’application à la lumière des premiers commentaires de l’Administration, Dr. fis. 2014, n. 22, 352, para.5. 120 Council Directive 2014/86/EU of 8 July 2014 amending Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, OJ L219 (2014), EU Law IBFD. - article 212 I a) of the CGI allows the deductibility of the interest paid to related parties provided they meet a specific kind of arm’s length test (or a fixed rate provided for by article 39 of the CGI)121; - article 212 I b of the CGI also provides for the so-called anti-hybrid rules mentioned above; - article 212 II and III of the CGI provides for thin capitalization rules (see below); - article 209 IX of the CGI (so called Carrez amendment) provides for a specific limit when a French company borrows money to purchase shares giving right to the participation exemption regime, (very) broadly stating that the company must prove that it exercise on influence on the target (or its French parent or its French sister does – giving rise to a possible incompatibility of EU law); and - article 223 B of the CGI (so-called Charasse amendment) provides for a specific anti-abuse rule targeting interest payment linked to the financing of an intra-group acquisition of a company becoming part of the group tax consolidation.

Rules exist with respect to their combinations and their consequences, especially with respect to the order in which they apply and to the fact that non-deductible interest as a result of those rules gives rise to deemed dividend distribution (which is a general rule set by article 109 and seq. of the CGI).

We below elaborate on thin capitalization rules due to the fact that they are closed to the OECD’s BEPS EBITDA limitation122. Article 212 II and III of the CGI provides for some ratio tests. Interest paid to related parties may be disallowed as deductible expenses if the company’s interest exceed all of the three following limits: - the result of the interest multiplied by the ratio 1.5 net equity ivided by the related party debts; - 25% of adjusted net income before tax which is the operating and financial result plus related party interest, amortizations and certain specific lease payments; and - the interest income received from related parties.

Those three tests are cumulative. Interest that exceeds the higher limit is not deductible provided it exceeds EUR 150,000. The portion of non-deductible interest may be carried forward and offset when there is excess capacity in the subsequent years based on the second limitation mentioned above. However, the interest carried forward is reduced by 5% each year, from the second accounting period following that in which the interest expense was incurred.

There are exceptions applicable123. Notably the non-deductibility would not apply if the French indebted company can demonstrate that the debt-to-equity ratio of the worldwide group to which it belongs exceeds its own debt-to-equity ratio.

3.6 Others

121 Article 212 of the CGI allows the tax deduction of interest paid to related parties up to the higher of (1) the average annual interest rate charged by lending institutions to companies for medium-term (two years or more) variable-rate loans, or (2) the interest that the indebted company could have obtained from independent banks under similar circumstances. 122 OECD, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4 - 2015 Final Report, (OECD Publishing 2015), International Organizations‘ Documentation IBFD. 123 E.g. those rules do not apply to financial institutions, specific rules apply to tax consolidation etc. French tax law provides for several other SAARs such as: - article 155 A of the Code général des impôts which is a provision aiming at fighting against “rent a star” scheme and more generally against the interposition of a foreign company invoicing services in France that are realized by an individual which generally is the sole shareholder or manager or service provider of the company; - article 223 quinquies C of the CGI implementing Country by country reporting rules that have has been introduced in French tax law in 2015: companies will have to communicate some tax related information to the tax authorities for the financial year 2016 in 2017; - article 123 bis of the CGI providing for CFC rules applicable to individuals; - article 221 of the CGI containing the exit tax rule which has been introduced along the line of the ECJ’s National Grid Indus (2011) line of case law, that is to say that upon a transfer of seat or of permanent establishment in an EU country the company can either pay immediately the taxes due on unrealized capital gains or pay through five instalments; - article 238 bis-0 I of the CGI that provides specific rules applicable to the transfer of assets to a trust or a comparable institution; - several provisions124 against the use of companies located in non-cooperative states and territories, that is to say, country that has not concluded exchange of information agreement with France nor with 12 OECD countries, this status leads notably to (i) apply higher withholding tax rates on French source income, (ii) disapply participation exemption regime for both capital gains and dividends125, (iii) to require justification of expenses paid to company resident in a country where it benefit from a special tax regime, (iv) to deny deduction of some listed expenses if paid to a non-cooperative states or territories unless the French company demonstrates that the payments does not have for object and effect the location of those expenses in those countries; and - articles 990 D the CGI provides a 3% tax on the value of French real estate (or legal rights) owned, directly or indirectly, by legal persons, trust or comparable institutions unless some conditions are fulfilled (the provision aiming at avoiding that an individual would interpose a foreign entity to try to escape the application of net wealth tax on French real estate).

There are also very targeted rules aiming at fighting some “optimization” schemes sometimes once they have been considered as an abuse of law in some specific circumstances. For examples, scheme where a company holding ailing company would make a capital increase before selling the shares or liquidating the company in order to be able to record in the tax return a deductible capital loss 126, scheme where a French company would purchase a company that has no activity anymore and has sold all its assets meaning that its only asset is cash (or the like), the newly acquired subsidiary would distribute dividends which would benefit from the participation exemption regime but will trigger a tax deductible depreciation of the shares in the books of the shareholder127…

124 FR: art. 39 duodecies, art. 57, art. 123 bis, art. 125-0 A, art 125 A, art. 145, art. 163 quinquies C, art. 163 quinquies C bis, art. 182 A bis, art. 182 A ter, art. 182 B, art. 187, art. 212, art. 219, art. 238-0 A, art. 244 bis, art. 244 bis A, art. 244 bis B of the CGI; and FR: art. L13 AB of the LPF. 125 As mentioned above, the Conseil constitutionnel considered that it should not be applied in non-abusive situations (n. 2014-437 QPC). 126 FR: Loi de finances rectificative pour 2012, 16 Aug. 2012, n. 2012-958, art. 18. 127 FR: Loi de finances rectificative pour 2012, 16 Aug. 2012, n. 2012-958, art. 16. Finally, even if it is not binding for anyone, the tax authorities now publish on a website some schemes that are, according to them, abusive and require the taxpayer not to implement them and in case of implementation in the past to rectify their tax return in order not to take the tax benefit 128.

3.7 Application of GAARs, TP rules and SAARs

As it clearly appears from the above there are many GAARs and SAARs applicable in France. The interaction between them are often (but not always) provided for by a regulation or by the tax authorities in their guidelines.

We can give some example of cases where the interaction between SAARs is provided for: - the tax authority, in its guidelines on the so called anti-hybrid instrument rule, provides that if the lender is subject to tax in France through the application of the CFC rules, then the interest are tax deductible in the hand of the borrower129; and - if CFC rules apply, dividends paid by the CFC should be exempt from tax provided they have been taxed in France (and up to the profit taxed) as a result of the CFC rules130.

With respect to the combination of a GAAR and a SAAR, in some cases, the abnormal act of management and transfer pricing rule could be applied, and also the latter with abuse of law, although we are not aware of case law in this field.

However, we hardly see any possible combination of the abuse of law and many of the SAAR (such as articles 209 B or 212 of the Code général des impôts), since once the latter are within the law they become a tax base rule and in most of the case the fraus legis branch of the abuse of law would not be applicable, simulation cases aside. If the taxpayer would not apply such a rule it may well be fine for having deliberately misapply the law (manquement delibéré). The next step is maybe to apply the fraus legis to scheme aiming at circumventing the application of the SAAR…

128 Available at http://www.economie.gouv.fr/dgfip/carte-des-pratiques-et-montages-abusifs (accessed 1 Feb. 2016). 129 FR: DGFiP, BOI-IS-BASE-35-50-20140805 para. 210 and 220. 130 FR: art. 102 Y of the annex II of the CGI; and FR: DGFiP, BOI-IS-BASE-60-10-30-30-20120912, para. 180 and seq.

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