FRANCE

FRENCH TAX AUDIT RULES AND GUARANTEES

French tax law is subject to compliance with international conventions, European law, fundamental rights and the control of the Constitutional Council. 

The intensification of repression in tax matters, justified by the legitimate fight against tax fraud, must also lead to require exemplarity from the tax authorities and a broader acceptance of state responsibility in the event of fault committed by the said administration.

The French tax Procedures code gives the tax authorities the power to audit tax returns and the documents used to establish them.  

The tax authorities also control documents submitted to obtain deductions, refunds or repayments. They may likewise ask taxpayers for any information and supporting documents relating to the declarations they have made or the documents they have filed.

A distinction must be stated between non-binding requests and binding ones.

Controls carried out by tax services may relate solely to taxpayers’ declarations.

Requests for information, justification or clarification are non-binding as there are no legal or regulatory provisions requiring the taxpayer to respond.

Non-binding requests made under article L. 10 of the Tax procedures code should not encourage the taxpayer to incriminate himself. He may therefore refrain from replying, or replying according to his own terms and conditions. 

If the taxpayer is unduly encouraged to respond and hence contribute to his own incrimination, leading to the application of penalties, the regularity of the procedure may be challenged on the basis of Article 6 of the European Convention on Human Rights (ECHR).

The main contradictory tax audit procedures are the “examen contradictoire de la situation fiscale personnelle” (ESFP) for examination of the tax situation of individuals, and the “vérification de comptabilité” for the accounting audit of professional activities and companies.

In the context of the ESFP under article L. 12 of the French LPF, which is not binding, the contradictory character of the examination can be purely written as the oral nature of such a debate is not mandatory on pain of irregularity of the procedure. 

It had been ruled that non-residents for tax purpose could not be subject to an examination of their tax situation of individuals . This led the legislator to amend the statutory provisions to extend its scope to non-resident taxpayers.

However, since only French resident for tax purpose are liable for income tax on all their income (i.e. from French and foreign sources), and must file a tax return in accordance with Article 170 of the French tax code, the demonstration by the tax authorities that a taxpayer may has his residence for tax purpose in France must, on pain of irregularity in the taxation procedure, be the subject of an adversarial debate imperatively prior to the sending of the notification of reassessment which marks the completion of the verification.

As in the case of an accounting audit, a contradictory examination of the taxpayer’s personal tax implies a prior dispatch or notification of the tax audit notice.

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UNITED KINGDOM

JAN. 14th, 2022 – BREXIT – The exemption from social security contributions on real estate capital gains remains applicable to residents of the United Kingdom (DGFIP France, January 14, 2022).

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OCT. 19th, 2021 – In accordance with the principle of subsidiarity of international conventions, the tax judge must first place himself in the field of domestic law (CE, Ass. June 28, 2002, No. 232276, min Sté Schneider Electric). And with regard to the Franco-British Convention, on the interpretation of Article 14 § 6, gains such as capital gains from the sale of securities may be taxed by the State whose beneficiary is no longer the resident at the time of their realization if it has been so during all or part of the six preceding years and that the taxation assigned by this State has been reduced by that levied by the State of residence at the time of the realization of gains (Administrative Court of Appeal of Versailles, October 19, 2021, n° 20VE01265).

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CHINA

NOV. 20th, 2024 – The French tax administration updated on November 20, 2024 (BOI-INT-CVB-CHN) its commentary on the agreement signed on November 26, 2013, between France and China, which entered into force on December 28, 2014. The agreement aims to avoid double taxation and prevent tax evasion with regard to income taxes, by specifying the methods for eliminating double taxation.

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MAY. 31st, 2022 – By an HSBC decision of May 31, 2022, the Council of State made the benefit of the “fictitious” tax credit, provided for by the Agreement concluded between France and China, subject to the fact that the taxpayer (the French company beneficiary of interest from Chinese sources) has included in its tax base the amount of “tax” deemed to be borne abroad. It thus considers that the principle of subsidiarity does not apply when the clause for the elimination of double taxation is in question, and indicates that when the clear stipulations of a tax treaty so provide, a fixed tax credit may present a taxable nature (CE, May 31, 2022, n° 461519, HSBC Bank Plc, Paris Branch).

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DEC. 21st, 2021 – Residents of France who received interest from a Chinese source benefited, when taxed in France, from a tax credit equal to the amount of Chinese tax levied on this income, which is fixed at a flat rate of 10% of the amount sums collected under article 22 of the agreement signed on May 30, 1984 between France and China, even though these interests would not have borne the tax in China. And only the amount of income received, excluding the tax credit, is taxable in France (Administrative Court of Appeal of Versailles, 20 Dec. 2021 No. 19VE03903, HSBC Bank PLC Paris Branch).

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DEC. 10th, 2021 – For the calculation of the right to impute in France the tax credit on interest received from China in accordance with the tax Treaty concluded between France and China, it is necessary to take into account in accordance with the so-called rule « règle du butoir – Bumper rule», the expenses made or incurred by the taxpayer for the acquisition of the said foreign income (Conseil d’Etat, Case law dated December 10th, 2021, n° 449637).