France Anti-Avoidance & GAAR Tax Guide

French anti-avoidance rules. The guide covers: the general anti-abuse rule — the "abus de droit" (the abuse of law) — the French GAAR (the "abus de droit") is codified in the Article L.64 of the "Livre des Procédures Fiscales" (the "LPF"); the tax authorities can challenge a transaction if: (a) the transaction is artificial (the "caractère artificiel" — the transaction has no economic substance or business purpose), OR (b) the transaction is abusive (the "but exclusivement fiscal" — the sole purpose of the transaction is to avoid the tax); the tax authorities can recharacterise the transaction (the "restauration de la véritable nature de l'acte") and apply the tax that would have been due if the transaction had not been entered into; the taxpayer can request the "rescrit fiscal" (the tax ruling) from the tax authorities to confirm that the transaction does not constitute the abus de droit; the penalties for the abus de droit — if the tax authorities successfully apply the abus de droit: (a) the 80% penalty (the "majoration de 80%") if the taxpayer has initiated the abus de droit (the "initiative de l'abus"), OR (b) the 40% penalty (the "majoration de 40%") if the taxpayer has participated in the abus de droit (the "participation à l'abus"); the substance over form (the "réalité économique") — the French tax authorities can disregard the legal form of a transaction and look at the economic substance; the principle of the "réalité économique" is applied in the context of the abus de droit and the "acte anormal de gestion" (the abnormal management act); the acte anormal de gestion (the "abnormal management act") — the tax authorities can challenge the expenses that are not in the interest of the company (the "intérêt de l'entreprise") and disallow the deduction; the abnormal management act applies to: (a) the excessive management fees (the "rémunérations excessives des dirigeants"), (b) the interest-free loans to the shareholders (the "prêts sans intérêt aux associés"), (c) the expenses that benefit a third party (the "dépenses au profit d'un tiers"), (d) the transfer pricing adjustments (the "prix de transfert anormaux"); the CFC rules (the "règles relatives aux sociétés étrangères contrôlées") — the French CFC rules (the "régime des sociétés étrangères contrôlées") apply to the French companies that control a foreign company (the "société étrangère contrôlée") in a low-tax jurisdiction (the "État ou territoire à fiscalité privilégiée"); if the foreign company is subject to a tax rate that is less than 50% of the French corporate tax rate (the "taux effectif d'imposition inférieur à 50% du taux français"), the French parent must include the foreign company's income in the French tax base (the "transparence fiscale" — the "look-through approach"); the CFC rules apply only if: (a) the French company holds directly or indirectly at least 50% of the shares or the voting rights of the foreign company (the "contrôle"), OR (b) the French company holds at least 5% of the foreign company and the foreign company is in a non-cooperative jurisdiction (the "État non coopératif" — the "ETNC"); the thin capitalisation rules (the "règles de sous-capitalisation") — the French thin capitalisation rules limit the deduction of the interest paid to the related parties (the "intérêts versés aux entreprises liées"); the interest deduction is limited to the higher of: (a) €3 million (the "seuil de 3 millions d'euros"), OR (b) 30% of the EBITDA (the "EBITDA fiscal" — the tax EBITDA), OR (c) 5% of the equity capital (the "capitaux propres") if the interest rate does not exceed the "taux de référence" (the reference rate set by the tax authorities); the interest that exceeds the limit can be carried forward (the "report en avant" — the "carry-forward of the excess interest") indefinitely but is limited to 50% of the excess per year; the anti-hybrid rules (the "règles anti- hybrides") — the French anti-hybrid rules implement the EU ATAD (the "Anti-Tax Avoidance Directive"); the rules neutralise the tax effects of the hybrid mismatches (the "disparités hybrides") — the differences in the legal characterisation of the entities, the instruments, or the payments between the two jurisdictions; the rules apply to: (a) the hybrid entities (the "entités hybrides"), (b) the hybrid instruments (the "instruments hybrides"), (c) the hybrid transfers (the "transferts hybrides"), (d) the imported mismatches (the "disparités importées"); the penalties for the tax fraud (the "sanctions pour la fraude fiscale") — the tax fraud (the "fraude fiscale") is a criminal offence (the "délit pénal") punishable by: (a) the imprisonment of up to 5 years (the "peine d'emprisonnement"), (b) the fine of up to €500,000 (the "amende pénale"), (c) the additional penalties (the "peines complémentaires") — the ban on the public procurement (the "interdiction des marchés publics"), the publication of the judgment (the "publication du jugement"), the confiscation of the assets (the "confiscation des biens"); the tax authorities' investigation powers (the "pouvoirs d'investigation de l'administration fiscale") — the tax authorities can: (a) request the information from the taxpayer (the "demande d'information"), (b) request the documents (the "demande de documents"), (c) conduct the audit (the "vérification de comptabilité"), (d) conduct the search and seizure (the "visite domiciliaire et saisie" — the "perquisition fiscale" authorised by the judge). All amounts in Euros (EUR). For related reading, see our Tax Audit & Appeals Guide → and Transfer Pricing Guide →.

Abus de Droit — GAAR

Two-prong test: The tax authorities must prove either: (a) the artificial nature of the transaction (the "caractère artificiel" — the transaction has no economic substance, the "motif économique" is absent), OR (b) the exclusive tax purpose (the "but exclusivement fiscal" — the transaction would not have been entered into but for the tax advantage). The taxpayer can defend the transaction by demonstrating the economic substance and the business purpose.
Tax ruling (rescrit): The taxpayer can request the "rescrit fiscal" (the tax ruling) under the Article L.64 B of the LPF. The tax authorities must respond within 6 months. If the tax authorities confirm that the transaction is not an abus de droit, the taxpayer is protected (the "garantie contre le redressement"). The ruling can be requested before the transaction is completed.

For the tax audit procedure and the taxpayer's rights during the audit, see our Tax Audit & Appeals Guide →.

CFC & Thin Capitalisation

CFC: The French CFC rules apply to the foreign companies in the low-tax jurisdictions (the "États à fiscalité privilégiée" — the effective tax rate below 50% of the French rate, i.e. approximately 12.5%). The French parent must include the foreign company's income proportionally to the French parent's shareholding. The foreign tax credit (the "crédit d'impôt étranger") is available for the foreign tax paid.
Thin cap: The interest deduction limit is the highest of: (a) €3 million, (b) 30% of the tax EBITDA, (c) 5% of the equity. The excess interest is carried forward indefinitely (the "report en avant") but is limited to 50% of the excess per year. The thin capitalisation rules apply to the related-party interest only (the "intérêts versés aux entreprises liées").

For the transfer pricing documentation (the "documentation des prix de transfert") and the penalties for the transfer pricing adjustments, see our Transfer Pricing Guide →.