Conseil d’Etat rules on French anti-avoidance rules related to low-tax jurisdictions
Nicolas Duboille of Sumerson analyses recent judicial rulings put forward concerning the application of the anti-avoidance rule in France.
The Conseil d’Etat recently issued two important decisions regarding the application of French domestic anti-avoidance rules designed to fight against profit shifting from France to low-tax jurisdictions (LTJs) (pays offrant un regime fiscal privilégié).
Amongst these rules, one can mention:
The controlled foreign corporation (CFC) rules (Article 209B of the French Tax Code (FTC), under which, if some conditions are met, the profits realised by a subsidiary established in such a LTJ are deemed to be distributed to its French controlling corporate shareholder and are thus fully taxed in France);
The transfer pricing rules (Article 57, FTC, allowing the French tax authorities to reassess the price applied to international transactions, without the need to demonstrate that the parties of the transactions are related when the other party is established in a LTJ); and
The presumption of non-deductibility of payments made to service providers located in a LTJ and of payments to a bank account of a financial institution established in a LTJ. (Article 238 A, §1, FTC, under which, for being entitled to deduct the interest expenses, royalties or fees paid, the French taxpayer must bring the evidence that they were paid in exchange for real services, and that the price paid is not excessive with regard to the nature and the fair value of the services supplied).
A LTJ is defined by the FTC as a jurisdiction where a taxpayer benefits from a level of direct taxation on income and on profits that is below by at least 40% (50% before 2020) than of the French tax that would be suffered should this taxpayer be located in France (Article 238 A, § 2, FTC).
Case Société Bernys: Considering all direct taxes on income and profit
In addition to taxes that are comparable to the French corporate income tax (CIT), other direct taxes on income and on profit must be considered when assessing the gap of taxation between France and the foreign country.
In a case relating to the payment of fees made in 2006 and 2007 in exchange for services provided by a company established in the Andorran principality, the Conseil d’Etat first reminded that the tax authorities bear the burden of proving that the jurisdiction is a LTJ in the meaning of Article 238 A FTC.
The French Supreme Court further ruled that the simple mention that there was no CIT in Andorra during the years concerned, without searching for and proving that no other tax on income and profit is applied in Andorra, is not enough to demonstrate that the jurisdiction is a LTJ (Conseil d’Etat, June 29 2020, No. 433937, Société Bernys).
It seems that the Conseil d’Etat has broadened the scope of the taxes to be considered for the assessment of the level of taxation in a foreign country, when comparing it with the French level of taxation. It appears that, under this new case law, foreign taxes to be considered here are not just limited to taxes that are ‘comparable to CIT’, but rather can also be direct taxes levied on gross income, on revenues, on earnings before interest and taxes (EBIT). For example, this includes the new digital services taxes that are burgeoning in several countries, which should possibly fall within the scope of these taxes.
This decision, rendered for the anti-abuse rule targeting payments made to a service providers established in a LTJ (Article 238 A, §2, FTC), will mechanically have an impact on the other anti-avoidance rules mentioned above relying on the definition of LTJ, i.e. the French CFC and transfer pricing rules.
Case Société Faraday: beneficial ownership has no impact when direct payment is made to a LTJ
The French Supreme Court ruled that the anti-avoidance mechanism of Article 238 A, §2, FTC applies even if the beneficial owner of the fees is not established in a LTJ, when the direct recipient of such fees does reside there (Conseil d’Etat, June 5 2020, No. 425789, Sté Faraday).
In the case at hand, the fact that the direct recipient of the fees, a company established in Hong Kong SAR (a LTJ according the tax court), had to repay such fees to the actual service providers, who were not located in Hong Kong SAR, was not considered by the Conseil d’Etat as precluding the French tax authorities from applying Article 238 A, §2, FTC.
The concept of beneficial ownership has thus no impact for the application of this specific anti avoidance rule in case of direct payment to intermediaries located in a LTJ. On the reverse, one can assume that the French Tax Authorities would try to apply Article 238 A, §2, FTC in an opposite situation, i.e. when the intermediary is not located in a LTJ and the actual service provider/beneficial owner does.
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