Please find below answers to the key questions usually raised by foreign companies facing a tax audit in France.
1. Examples of triggers of a tax audit in France of a foreign company.
Foreign companies may be subject to several administrative controls in France, even if they operate in France temporarily (e.g. construction sites or works) or from a place located outside the French territory (e.g. internet distance sales or operations carried out through a French agent - third party or even subsidiary).
Usually, works carried out "on site" on the French territory can first entail an audit from the labor inspection on the conditions / authoritation of the personnel, which itself can lead to an URSAFF audit (French administration in charge of recovering social contributions) but also to a tax audit, to make sure that the foreign company pays its taxes in France.
It is also now common for the internet distance sales (particularly via marketplace platforms operating in France) that a tax audit of the foreign company be initiated after cross-referencing of tax returns of the marketplace customers or following a tax audit of the French marketplace itself.
Altough the french tax authorities have not always been successful in this regard (notably until now inthe tax reassessments issued against Google), recent audits have also been initiated to characterize permanent establishments of foreign companies in their French subsidiaries (acting as their dependent agents).
2. You have been subjected to a tax search procedure (perquisition fiscale) in France ?
The tax agents have, according to article L16 B of the French Tax Procedures Code, a right of visit and seizure (perquisition fiscale) in all places, even private, for the investigation of infringements in tax matters.
On request, the administration first seizes the French judge to authorize the procedure. The authorization of the judge is only granted if there are presumptions that the foreign company avoids the establishment or payment of taxes on revenues or incomes or value-added tax (VAT).
The tax search can only occur between 6 am and 9 pm. Tax agents must be accompanied by a judicial police officer. They may search in all places (business premises, construction sites, private homes, etc.) items and documents relating to fraudulent acts, whatever the support.
At the end of the tax search, a report of procedure followed and the entirety of the documents seized is given to the taxpayer.
Two actions against this tax search procedure (perquisition fiscale) are at your disposal: (i) one against the visit and seizure “on site” operations, to be introduced within 15 days from the delivery or reception of the report, and (ii) the other against the order of the judge who authorized the tax search, to be introduced within 15 days from the formal notification of the order.
In any case, whatever the prejudicial character of the seized documents, it is strongly advised to introduce these judiciary actions to challenge the presumptions of fraud of the administration and more generally to present the position of the company (productions of proper justifications and defense arguments) in anticipation of the likely implementation of a more complete procedure.
3. You have been subjected to a tax audit and just received a reassessment notice (proposition de rectification) ?
The French tax authorities may, according to article L 13 of the LPF, carry out a tax audit of your company (initiated by the formal notification of a verification notice – avis de vérification - to which is attached a charter of the rights and obligations of the verified taxpayer).
If the audit is usually carried out at the headquarter of the company, for foreign companies without physical presence in France the audit is carried out mainly through the exercise of the right of communication of the tax administration, to the company itself, to third parties (clients, banks, marketplaces, agents, etc.), but also very often by the implementation of the international administrative assistance of the tax authorities of the State of the company's headquarter.
Due to its very wide Double Tax Agreement network, French administration usually obtains communication of information through this channel. When it plans to make a reassessment, the administration first sends you a “proposal of reassessment” (proposition de rectification).
You have 30 days (extended to 60 days on request) to communicate your comments. Then, the administration notifies its “response to the taxpayer's comments” (réponse aux observations du contribuable) indicating if it maintains or not the proposed reassessments.
In case of disagreement between you and the tax administration, you can also ask for an interview with the auditors’ supervisor, or even file an action with a departmental commission (entitled to issue opinions on the reassessments - generally followed by the administration) if your disagreement persists despite these exchanges. These possible actions must be exercised before the issuance of the formal recovery title (see below).
At the end of the audit procedure, if the reassessments are maintained, a formal recovery title (avis de mise en recouvrement – AMR) will be issued. After such issuance a litigation procedure can be initiated (see below).
4. You have not responded to the French tax administration requests and it has implemented the automatic self-assessment process (procédure d’imposition d’office) ?
The reassessment procedure is in principle contradictory and is characterized by a dialogue between the administration and the taxpayer.
However, in the absence of timely declarations or response to requests for clarification and justification, the administration may implement the self-assessment procedure which allows it to self-assess the taxes due on the basis of the only information available. The burden of the proof is then reversed, and it is the tax payer which has to prove that the reassessed amounts are exaggerated. Such unilateral procedure has also the effect of depriving the taxpayer of his right to seize the auditors’ supervisor.
If the company refuses to respond to the requests of the administration it is also exposed to the consequences of the opposition to tax audit (penalty of 100% particularly).
It is therefore strongly advised to cooperate with requests from the tax administration and to establish a constructive dialogue.
5. The French tax administration has applied a penalty of 80% for the exercise of an occult activity (activité occulte) ?
As regards foreign companies which did not file any return in France, it is now very common that the French tax administration applies the penalty of 80% (article 1728-1.c of the CGI) for occult activity on the grounds that the company has not made known its activity to a French center of corporate formalities or the registry of the French commercial Court.
In certain situations this penalty of 80% appears challengeable. This is particularly the case in the context of proceedings against a foreign company duly registered in the EU where it has already paid its taxes on the income that the French administration intends to tax in France. It is therefore appropriate to challenge this characterization of an occult activity and the corresponding application of the penalty of 80%.
6. How to litigate before Court against the tax reassessments maintained?
When the administration maintains the reassessments and issues a formal recovery title (avis de mise en recouvrement - AMR), you have 3 years (until December 31st of the third year following the year in which the AMR was notified) to challenge it.
In order to challenge the amounts recovered, you must send the administration a preliminary claim (réclamation contentieuse). In the event of a formal rejection answer notified to you, you have 2 months to file a claim before the competent administrative tribunal. After a period of silence of 6 months, the absence of response from the tax administration is a deemed rejection of your claim.
The litigation procedure is quite long. On average, it takes at least one year to obtain a decision of the administrative tribunal, then one to two years more in case of appeal and finally at least an additional year to obtain a decision of the Supreme Court.
7. In the event of a challenge of the taxation before the administrative tribunal, is there a possibility to obtain a suspension of payment of the reassessed taxes until the litigation is resolved ?
Litigation claims are not, by themselves, suspending the payment. In case of litigation, you must therefore in principle pay the amount of the rights in principal and the amount of the fines or penalties applied within the legal period.
However, the law allows to apply for a suspension of payment. For this purpose it is mandatory to formally insert in your claim a request for suspension of payment. This suspension of payment is a right.
However, the administration will ask to provide accurate guarantees. In the absence of guarantees or if the guarantees offered are considered insufficient, the administration may take precautionary measures for the challenged taxes (conservatory seizures ...).
If the suspension of payment is granted but the tax payer does not win ultimately the case at court, late payment interest will have to be paid.
8. Is it possible to negotiate a settlement of the tax debt or payment by installments ?
A settlement with the tax administration, containing written commitments on both sides, may in principle only be agreed on the amount of penalties on direct taxes.
Upon request, the tax administration may accept an installment plan but the foreign company will have, in order to obtain it, to prove the existence of financial difficulties and give to the tax administration sufficient payment guarantees. The request must precisely describe the modalities of the installment: notably the duration (it cannot exceed two years) and the payment of a first significant installment.
Our dedicated team of tax Attorneys at Law, fluent in French/English/Spanish, assists on a day to day basis foreign companies in their tax audits and litigations in France.
We are at your disposal to assist and advise you.