Abuse of tax law: new definition to fight against tax optimization (2020)

The definition of tax abuse has been modified. Indeed, since January 1, 2020, the abuse of tax law comes in two parts.

 

THE ABUSE OF CLASSIC TAX LAW FOR LEGAL FICTITIOUS OR FRAUDULENT USE OF THE LAW

 

« To restore their true character, the administration is entitled to set aside, as not being opposable to it, acts constituting an abuse of rights, either because these acts are fictitious, soit que, they seek the benefit of a literal application of the texts or decisions against the objectives pursued by their authors, they could not have been inspired by any other motive than that of evading or mitigating the tax burdens which the person concerned, if these acts had not been passed or carried out, would normally have borne, having regard to his actual situation or activities. » (Définition de l’abus de droit fiscal pour fictivité juridique ou fraude à la loi – article L64 du livre de procédure fiscale).

By « juridical fictitiousness »,it must be understood that it is the objective difference between the juridical appearance created by the act and the reality. This means that there is a fraud to the law whenever there is the search for an exclusively fiscal purpose and that there is the obtaining of a fiscal advantage by a literal application of texts or decisions against the objectives pursued by the legislator.

The sanction for abuse of rights for legal fictitiousness or fraudulent use of the law is very heavy. There are two tax increase that may apply:

  • An 80% surcharge in the event that the taxpayer is the main instigator or the main beneficiary of the abuse of rights
  • An increase of 40% in the event that the taxpayer did not initiate the legal arrangement or has only obtained minor benefits compared to those perceived by the other people involved.

 

 

THE NEW MINI ABUSE OF TAX LAW FOR THE PURSUIT OF A PRIMARILY TAX OBJECTIVE

 

« The administration is entitled to exclude, as not being contrary to it, acts which, seeking the benefit of a literal application of texts or decisions against the objectives pursued by legislators, have as their main motive to avoid or mitigate the tax liability that the person concerned, if these acts had not been passed or carried out, would normally have to bear in view of his actual situation or activities.. » (definition of mini-abuse of tax law).

It is important to specify that this mini abuse of rights can only be invoked from January 1, 2021 for all acts performed from January 1, 2020.

To be able to demonstrate the existence of an abuse of rights, two elements must be present:

  • One is the use of a text that goes against the intentions of the legislator,
  • On the other hand, the main desire to avoid tax (for the acts referred to in Article L. 64 A du LPF).

The administration, in order to retain the abuse of tax law for the pursuit of a mainly fiscal objective, must prove that the main reason for this act was to reduce the tax burdens that the taxpayer would normally have to incur in view of his actual situation or activities if these acts had not been carried out or performed. All of this is eminently subjective.

The rate of duty increase in the event of an adjustment is :

  • 40% in the event of deliberate breach or abuse of rights
  • 80% in case :
    • Fraudulent schemes
    • Abuse of rights (if the taxpayer is the principal initiator of the act constituting the abuse of rights or was the main beneficiary)
    • Concealment of part of the price stipulated in a contract
    • Application of the provisions of Article 792 bis of the CGI.


It is good to know that taxpayers who make omissions or inaccuracies in their return are presumed to be involuntary. This means that the surcharges provided for in Article 1729 of the CGI can only be applied if the administration establishes that the omission or inaccuracy is deliberate.

 

 

ABUSE OF TAX LAW: A POWERFUL WEAPON TO CURB TAX OPTIMIZATION

 

The tax authorities remain extremely vague in the various comments that can be found in BOFIP. They do not shed light on the validity of a certain number of tax schemes. Is to discourage the taxpayer? To "scare" him?

Faced with this vagueness, in order to limit the possible risks, it is more judicious to ask yourself a few small questions when setting up an assembly:

  • Should I set-up for the sole purpose of reducing my taxes?
  • If my goal is to reduce my tax, do I use a tax loophole? Or on the contrary, I am simply looking for a profit in view of a literal application of texts or decisions against the objectives pursued by their authors?