Tax litigation · Grounds for reassessment

Tax abuse of law and the mini abuse of law

Are the tax authorities relying on an abuse of law against you? They set aside an act they regard as fictitious, or driven by a tax objective contrary to the intention of the legislature. Since the introduction of the mini abuse of law (French Book of Tax Procedures art. L. 64 A), a merely predominant tax purpose is enough to justify the challenge. It is a heavy procedure, yet a closely framed one, in which every condition can be argued. The firm contests the characterisation, the procedure and the surcharges.

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— In brief
Abuse of law (L. 64)
Fictitious act, or seeking the literal benefit of the texts for an exclusively tax purpose
Mini abuse (L. 64 A)
Predominant tax purpose (2019 Finance Act art. 109), a broader notion
Safeguard
Possible referral to the tax abuse of law committee
Advance ruling
Prior securing possible (French Book of Tax Procedures art. L. 64 B)
Surcharge
80% as a rule, 40% depending on the taxpayer role (French Tax Code art. 1729 b)
01

What is abuse of law?

Abuse of law (French Book of Tax Procedures art. L. 64) allows the tax authorities to set aside, as not enforceable against them, acts that are either fictitious, or that, seeking the benefit of a literal application of the texts against the objectives of their authors, can only have been inspired by an exclusively tax motive.

There are therefore two limbs: simulation (a fictitious act) and fraud on the law (a legally real but artificial arrangement, contrary to the intention of the legislature). The sanction is heavy, but the conditions are strict and cumulative.

02

Abuse of law (L. 64) and mini abuse (L. 64 A)

Since the 2019 Finance Act (art. 109), two mechanisms coexist that must be carefully distinguished:

  • French Book of Tax Procedures art. L. 64: the act must have an exclusively tax purpose. A demanding test for the tax authorities;
  • French Book of Tax Procedures art. L. 64 A (the mini abuse): a predominant tax purpose is enough. A broader notion, applicable to most taxes;
  • French Tax Code art. 205 A: an anti-abuse clause specific to corporate income tax, with a distinct scope.

Identifying the exact basis relied upon is decisive: the conditions, the burden of proof and the safeguards are not the same.

03

A closely framed procedure

The abuse of law procedure is surrounded by safeguards: an enhanced statement of reasons, the possibility for both the taxpayer and the tax authorities to refer the matter to the tax abuse of law committee, whose opinion orients the burden of proof. Upstream, the advance ruling of article L. 64 B of the French Book of Tax Procedures allows a transaction to be secured by questioning the tax authorities: silence within the prescribed period amounts to a safeguard.

Reassessments are in principle accompanied by a surcharge of 80%, reduced to 40% depending on the taxpayer role in the arrangement (French Tax Code art. 1729 b).

04

Frequent examples and areas of abuse of law

Abuse of law arises on recurring grounds that case law and the tax abuse of law committee have progressively mapped out. Knowing their contours helps to gauge the risk and prepare the defence.

A few classic configurations:

  • Gift before sale: the gift of shares followed by their sale is legitimate, but becomes abusive if the donor in fact recovers the price (fictitious gift or reappropriation of the funds);
  • Contribution-sale (French Tax Code art. 150-0 B ter): the tax deferral is challenged where the sale proceeds are not reinvested in a genuine economic activity within the time limits;
  • Interposition of companies devoid of substance, shell holdings intended to house a loss, or circular arrangements lacking any economic justification;
  • Artificial recourse to a tax treaty or a favourable regime (parent-subsidiary, exemptions) for the sole purpose of avoiding tax.

The tax abuse of law committee publishes its opinions each year: they provide a valuable analytical framework, as they set out the criteria used to establish, or rule out, an abuse. Conversely, a transaction endowed with genuine economic substance and documented non-tax motives withstands the characterisation.

05

Our lines of defence

The defence consists first in demonstrating the substance and economic reality of the transaction, and the existence of motives other than tax ones (asset-related, economic, organisational) sufficient to remove it from the characterisation of abuse. To this are added the discussion of the basis relied upon (L. 64 vs L. 64 A), compliance with the procedural safeguards (statement of reasons, committee), and the challenge to the surcharges, the proof of which falls on the tax authorities. Where appropriate, the firm secures future transactions by way of an advance ruling.

At the end of the litigation, close to 31% of cases based on abuse of law are resolved, wholly or in part, in favour of the taxpayer. The stakes of a rigorous challenge are therefore real.

Frequently asked questions

Tax abuse of law: your questions

What is the difference between abuse of law and the mini abuse of law?

The abuse of law of article L. 64 of the French Book of Tax Procedures requires an exclusively tax purpose. The mini abuse of article L. 64 A, introduced by the 2019 Finance Act, is satisfied with a predominant tax purpose: its scope is broader.

Is optimising your taxation an abuse of law?

Not in itself. The taxpayer may choose the least taxed route. An abuse is established only if the act is fictitious or artificial and pursues a tax objective contrary to the intention of the legislature. The substance and non-tax motives of the transaction are decisive.

What is the tax abuse of law committee?

An advisory body that the taxpayer or the tax authorities may refer to in the event of disagreement. Its opinion bears on the burden of proof before the court. Referring the matter to it is a line of defence in its own right.

Can a transaction be secured in advance?

Yes, through the advance ruling of article L. 64 B of the French Book of Tax Procedures: by describing the transaction to the tax authorities, a position is obtained, and silence within the prescribed period amounts to a safeguard against abuse of law.

What penalties apply in the event of abuse of law?

As a rule a surcharge of 80%, reduced to 40% depending on the role played by the taxpayer in the arrangement (French Tax Code art. 1729 b). These surcharges are challenged separately from the tax itself.

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A reassessment based on abuse of law?

A confidential initial consultation to characterise the basis relied upon, demonstrate the substance of the transaction and activate the procedural safeguards.

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François Ouairy, avocat associé

Written by

Me François Ouairy, avocat associé en charge du bureau de Paris, expert en fiscalité immobilière, fiducie et fiscalité financière.

This page presents the abuse of law procedures for information purposes; each case calls for a specific analysis. References to the French Book of Tax Procedures and the French Tax Code in force at the date of writing.