The settlement with the tax authorities
Faced with a reassessment, litigation is not the only path. The non-contentious jurisdiction allows the penalties to be reduced, either through a remission or reduction, or through a settlement that fixes the amount of the surcharges by common agreement. When properly handled, this route secures and shortens the resolution of the dispute. The firm assesses whether this route is appropriate and conducts it for you.
- Framework
- Non-contentious jurisdiction (French Book of Tax Procedures art. L. 247)
- Covers
- Penalties, surcharges and fines (and, in certain cases, late-payment interest)
- Principal
- Remission possible on the principal of direct taxes in cases of hardship or destitution; never on registration duties, the IFI, VAT or stamp duty
- Two routes
- Remission or reduction (unilateral decision); settlement (agreement)
- Effect
- Final settlement: mutual waiver of litigation (French Book of Tax Procedures art. L. 251)
The principle: negotiating the penalties, not the tax
The non-contentious jurisdiction (French Book of Tax Procedures art. L. 247) allows the tax authorities to grant reductions. It covers mainly the penalties, surcharges and fines, and, in certain cases, late-payment interest. The settlement never affects the principal of the tax.
One nuance, however, often overlooked: the discretionary remission may cover the principal of direct taxes (income tax in particular) where the taxpayer is unable to pay owing to hardship or destitution (French Book of Tax Procedures art. L. 247, 1°). This possibility does not exist for registration duties, the IFI, VAT or stamp duty.
Settlement, remission, reduction
Within the non-contentious jurisdiction, two mechanisms allow the sums due to be lightened: the remission or reduction, a unilateral abandonment of all or part of the penalties by the tax authorities, and the settlement, a negotiated and final agreement on the amount of the penalties. They follow distinct logics:
- The remission or reduction: a unilateral decision by the tax authorities abandoning all or part of the penalties, often in light of the taxpayer's good faith or situation;
- The settlement (French Book of Tax Procedures art. L. 247, 3°): a written agreement, within the meaning of article 2044 of the French Civil Code, by which the tax authorities and the taxpayer together fix the amount of the penalties, in return for an undertaking to pay and to waive litigation.
The settlement is only possible so long as the penalties are not final; once the tax has been definitively assessed, the room for manoeuvre narrows to the discretionary remission. The tax authorities may not, moreover, enter into a settlement where the taxpayer resorts to dilatory manoeuvres intended to hinder the proper conduct of the audit (French Book of Tax Procedures art. L. 247).
Remission or reduction, or settlement?
| Criterion | Remission / reduction | Settlement |
|---|---|---|
| Nature | Unilateral decision by the tax authorities | Written agreement (art. 2044 of the French Civil Code) |
| Covers | Penalties; principal of direct taxes in cases of hardship or destitution | Penalties not yet final |
| Consideration | None (favour) | Undertaking to pay and to waive litigation |
| Effect | Total or partial abandonment | Final: mutual waiver (L. 251) |
| Basis | French Book of Tax Procedures art. L. 247 (1° and 2°) | French Book of Tax Procedures art. L. 247 (3°) and L. 251 |
When to use it, and when to prefer litigation
The choice between settlement and litigation is strategic. The settlement brings certainty and speed, and avoids the hazard of a trial; but it entails giving up the right to challenge. Litigation is warranted where the principal of the tax is seriously arguable. Often, the two approaches are combined: the merits are challenged while keeping open the negotiation of the penalties.
The firm assesses the benefit / risk ratio, quantifies the scenarios and conducts the chosen route with the competent department.
The effects of the agreement
Once approved and performed, the settlement becomes final: it entails a waiver, on both sides, of any litigation proceedings on the points it resolves (French Book of Tax Procedures art. L. 251; BOI-CTX-GCX-10). The taxpayer undertakes to pay the agreed sums within the deadlines; in return, the tax authorities abandon the fraction of penalties settled.
Conversely, if you refuse the proposed settlement and bring the dispute before the court, it is the judge who fixes the rate of the surcharges, together with the tax base (French Book of Tax Procedures art. L. 251). This is a key parameter in the choice between settling and challenging.
The tax settlement: your questions
Can the amount of the tax itself be negotiated?
By settlement, no: it covers the penalties, surcharges and fines (and sometimes late-payment interest), not the principal. A discretionary remission may, however, cover the principal of direct taxes (income tax in particular) in cases of hardship or destitution (French Book of Tax Procedures art. L. 247, 1°), excluding registration duties, the IFI, VAT and stamp duty. To challenge the merits of the principal, the route remains litigation.
What is the difference between a discretionary remission and a settlement?
The remission or reduction is a unilateral decision by the tax authorities that reduces the penalties. The settlement is a written agreement fixing the amount of the penalties by common agreement, in return for payment and a waiver of litigation.
Does signing a settlement prevent me from challenging afterwards?
Yes, on the points it resolves. A settlement that has become final entails a waiver of litigation (French Book of Tax Procedures art. L. 251). Hence the importance of measuring its scope before signing.
At what point should a settlement be requested?
So long as the penalties are not final. In practice, the negotiation is prepared from the adversarial phase onwards and may be concluded before proceedings are brought or in the course of litigation.
Why go through a lawyer?
To assess objectively the benefit / risk ratio between settlement and litigation, to quantify the scenarios, and to conduct the negotiation. Exchanges with the lawyer are covered by professional privilege.
Settle or challenge: let us make the right choice
A confidential initial consultation to quantify the scenarios, measure the scope of an agreement and conduct the route that best protects your interests.
Written by
Me Jonathan Bensaid, avocat fiscaliste, fondateur du cabinet Bensaid Avocats, inscrit aux Barreaux de Paris & Genève.
This page presents the non-contentious jurisdiction for information purposes; each matter calls for a specific analysis. References to the French Book of Tax Procedures in force at the date of drafting.