background image
13.1. GAAR and General Anti-Avoidance Measures

There are two general anti-avoidance approaches under French law: the abnormal act of management approach and the abuse of law (fraus legis or “abus de droit”) approach. The abuse of law doctrine itself is subdivided into 3 different iterations, all addressed below.

Abnormal Act of Management

While the tax authorities may not intervene in how businesses are managed, they are empowered, under the abnormal act of management approach, to reassess companies with respect to management decisions that are manifestly contrary to the interest of the business. Examples of transactions that can be challenged in this manner include interest-free loans, disposal of assets for a consideration below fair market value (as a rule of thumb, generally 20% less), or debt waivers. In order to invoke the abnormal management theory, the tax authorities must substantiate that the disputed act was intentionally taken by the enterprise and resulted in its “impoverishment.”

Abuse of Law Doctrine

Standard Abuse of Law Doctrine (Tax Procedures Code LPF Art. L64)

The abuse of law (fraus legis) doctrine was incorporated in French tax law in 1941 (with an earlier version dating back to 1925). It empowers the tax authorities to disregard legal acts, whether or not written, which are artificial (fictionality test) or seek benefit from the interpretation or application of legal texts in violation of the intention of the legislator for no other purpose than to reduce their tax burden (exclusive tax motive test).

In addition to the reassessment resulting from disregarding the legal act, the invocation of the abuse of law doctrine implies the application of a penalty of 40% or 80% depending on the seriousness of the offence. Disputes involving the abuse of law doctrine may be submitted to a consultative “Abuse of Law Committee, CADF,” at the initiative of the taxpayer or the tax administration. The Committee is composed of representatives of the tax administration, the judiciary, the tax, notarial and accounting professions, and academia. Since 2019, the burden of proof in substantiating the existence of an abuse of law lies with tax administration (previously, the burden of proof fell on the party receiving the negative assessment of the Committee). Also, from the same date, taxpayers may request a ruling on whether a contemplated act would be considered as an abuse of law. Failure by the tax administration to respond within six months is a tacit recognition that no abuse of law will be invoked.

The tax authorities maintain a non-exhaustive catalogue (in French) of arrangements which they consider as potentially abusive and, therefore, potentially subject to the anti-tax avoidance rules, including but not limited to the abuse of law doctrine.

Simplified Abuse of Law Doctrine (“Mini Abus de Droit”, LPF Art. L64A)

The Finance Law 2019 introduced a new iteration of the abuse of law doctrine (generally referred to a “mini abus de droit”), without dispensing of the existing general abuse of law doctrine under LPF Art. L64 or the specific anti-avoidance rules (see below). The main difference between the pre-existing general abuse of law doctrine under LPF Art. L64 and the new iteration under LPF Art. L64A is that the former targets arrangements with an exclusive tax motive, while the latter targets arrangements with a principal tax motive. Another difference is that in contrast to the general anti-abuse doctrine, the “mini abus de droit” does not come with its own sanctions but follows the sanctions and penalties applicable under general tax law. The new iteration applies for tax years commencing on or after 1 January 2020. Since the “mini abus de droit” is a general rule, it does not apply to corporate income tax which is covered by a specific abuse of law rule introduced at the same time in implementation of the EU ATAD Directive (see below).

Specific Anti-Abuse Rule with Respect to Corporate Income Tax

In connection with the transposition into French domestic law of the EU Anti-Tax Avoidance Directive (ATAD), the Finance Law 2019 introduced a specific anti-abuse rule dealing with corporate income tax matters (codified under Art. 205A of the French General Tax Code (CGI)). The measure in fact already existed under French law but was restricted to the participation-exemption regime and the dividend withholding tax exemption on distributions to EU parent companies under the Parent-Subsidiary Directive. The Finance Law 2019 expanded its scope of application to corporate income tax matters generally. As a result, corporate tax matters are henceforth no longer covered by the general abuse of law doctrine and can only be addressed by means of this new specific anti-avoidance rule. The rule empowers the tax authorities to disregard, for the purposes of determining the corporate tax liability, any arrangement or series of arrangements wherein the main purpose or one of the main purposes is receiving a tax advantage that is not in line with the objective or finality of the tax law, to the extent the arrangement or series of arrangements are not for valid commercial reasons that reflect economic reality. This rule applies to tax years commencing on or after 1 January 2019.