The French tax administration has recently published an updated list of abusive practices and fixtures that are considered to be contrary to the law. Among these are certain inter-group arrangements.
Relocation of profits after restructuring: Following a reorganization within a group that led to a transfer of activities between two member companies of the group, the prices between the two entities should reflect the nature borne risks, and functions performed by each of them; these prices must not no circumstances lead to undue profits relocate in a country where they will be subject to taxation more favorable than that of France. Pursuant to Article 57 of the General Tax Code, unduly transferred profits abroad by a company to another company within the same group should be reinstated its taxable income.
Unjustified payment of commissions or royalties: Payments to a company that has no premises or means of operation, and for which the French company is unable to justify the rationale of the services supplied; moreover, the French company did not declare the sums paid on the DAS2 return. The possible implications for taxpayers include:
- Risk of losing eligibility to deduct the expense and recognition of deemed distributed income subject to withholding tax.
- 40% penalty for deliberate failure.
- Penalty equal to 50% of the amounts that were not reported on the DAS 2 return.
- Taxation of the actual beneficiary in France.
Tax Treaty Abuse: The interposed structure only plays a “relay” role with respect to payment of the amount of royalty paid, and does not have any substance. Implications for taxpayers could include an adjustment of the withholding tax and imposition of an 80% penalty.
Other practices, arrangements identified by the tax administration as tax-avoidance or abusive are:
- Disguised relocation of staff
- Double deductions claimed for loan interest
- Non-application of withholding tax on dividends
- Convertible bonds issued, with a distribution of dividends
