Fight against fraud and money laundering

TRACFIN Report 2018-2019

Abuse of Rights

Tax abuse for fictitious transactions or law evasion is defined in Article L.64 of the French Tax Procedures Code (Livre des procédures fiscales). This article provides that the tax authorities are entitled to disregard acts that are fictitious or solely intended to evade or reduce tax liability.

This mechanism is often used to avoid capital gains tax, income tax, or inheritance tax.

Examples of Tax Abuse

1. In the context of business transfer:
   A common scheme involves a majority shareholder carrying out two operations on the same day: a donation-split of shares and the sale of shares to a newly created company. This new company, of which the first child is the sole shareholder, is dedicated to managing the shares. Subsequently, the shares from the donation-split are contributed to the capital of the new company. Additionally, it is arranged that the payment of the balancing amount is made by the company rather than by the beneficiary of the donation-split.

   The tax authorities consider that, in this scheme, the payment of the balancing amount by the company, without recording it as a shareholder current account, constitutes an indirect distribution and qualifies as tax abuse.

2. Abuse by converting salary into termination indemnity or service fee:
   Tax abuse is characterized when a contract allows a company executive to receive additional remuneration at a lower tax rate within their group.
3. Abuse related to PEA (Equity Savings Plan):
   The scheme is as follows: an employee invests in shares of their employer at a highly preferential price, places these shares in a PEA (capital gains tax-exempt account), and then resells them a few months later at a significantly higher price. This practice is considered tax abuse.

Suspected Tax Fraud on the Purchase, Sale, and Holding of Foreign Assets

Hiding foreign assets from the tax authorities constitutes tax fraud.

TRACFIN notes that French residents holding foreign investments often use intermediary companies or undisclosed foreign bank accounts to conceal their foreign assets from the tax administration.

These are just a few examples among many highlighted by TRACFIN.

The Subirats Avocat firm remains at your disposal for:

• any further clarification regarding an ongoing tax audit,
• or advice to ensure that your operations are conducted legally and efficiently.