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France heightens criminal enforcement of tax fraud

After numerous debates, French Parliament passed, on October 23, 2018, the Law on the Fight against Tax Fraud (Loi relative à la lutte contre la fraude fiscale – hereafter "2018 Tax Fraud Law" or "the Law"). The Law aims at strengthening the tools given to criminal and tax law enforcement authorities when combating tax fraud in France.

Extension of the number of investigated cases due to the partial removal of the "Bercy lock"

Before the 2018 Tax Fraud Law, the prosecution of allegations of tax fraud was subject to the prior filing of a criminal complaint by the French Tax Administration (hereafter "FTA"). However, before doing so, the FTA had to obtain the approval of the Tax Offence Commission, an independent administrative body.

This mechanism – known as the "Bercy Lock" – was highly criticized in France for giving a wide discretionary power to a governmental body on prosecution. In order to circumvent the Bercy Lock, public prosecutors tended to prosecute tax fraud allegations based on money of laundering of tax fraud instead.

While the 2018 Tax Fraud law did not entirely remove the Bercy Lock, it has significantly limited the discretionary power of the FTA which is now under an obligation to refer a case to the prosecution office when two conditions are cumulatively met:

1. 1st condition: tax breaches established in the context of a tax reassessment concern rights exceeding a threshold of €100,000;

2. 2nd condition: the administrative penalties imposed during the tax audit were one of the following:

a. A 100% penalty imposed in the event of an ex officio assessment following a refusal by the taxpayer to let the FTA conduct a tax audit (Article 1732 of the French General Tax Code – Code général des impôts);

b. A 80% penalty imposed in the event of concealed activities, abuse of rights, fraudulent practices or failure to file a tax return regarding certain sums and assets (Article 1728, 1, c; Article 1729, b or c; Article 1729-0 A, I; Article 1758 of the French General Tax Code);

c. A 40% penalty imposed when the tax payer failed to file a tax return filed within 30 days of receipt of a formal notice or in the event of a deliberate breach (Article 1728, A, b; Article 1729, a or b of the General Tax Code), provided that i) the taxpayer has already been subject to one of these three penalties or ii) a complaint from the FTA has already been filed against him in the past 6 years.

The criteria laid down by the 2018 Tax Fraud Law are so broad that many tax reassessments will now be automatically referred to the prosecutor. This will therefore significantly increase the number of prosecutions. According to the government's estimates, the number of referrals to the prosecutor is likely to increase up to two thousand a year.

The obligation to refer a case to the prosecutor only applies to tax reassessments notified to the taxpayers after October 24, 2018. It does not apply retroactively.

The 2018 Tax Fraud Law also introduced the possibility for the prosecutor to extend the scope of the investigation to other types of taxes and other time periods once a complaint has been filed by the FTA. Before then, the prosecutor could not investigate beyond the scope of the allegations contained in the FTA's criminal complaint.

Creation of a tax police

The 2018 Tax Fraud Law not only extended the number of potential criminal prosecutions, it also gave law enforcement authorities the means to investigate by creating a new dedicated police unit called the "tax police" working under the supervision of the Ministry of Economy and Finance. The unit will be composed of officers from the National Judicial Customs Service (Service national de la douane judiciaire) and well as judicial police officers.

The tax police will now have access to information held by various administrative bodies.

Opening of guilty pleas and French deferred prosecution agreements (CJIP) to tax fraud cases

One of the most awaited provision of the 2018 Tax Fraud Law was the extension of possibility to enter into guilty pleas as well as into French styled deferred prosecution agreements (Convention judiciaire d'intérêt public – hereafter "CJIP") to tax fraud cases.

Parliament had previously refused to include tax fraud among the offences that could lead to a guilty plea or a CJIP by fear of interfering with the discretionary powers granted to the FTA in the matter of tax fraud. This strict approach was incoherent with the fact that companies were able to conclude a CJIP based on money laundering of tax fraud as HSBC did on October 30 2017. Thankfully, the upcoming increase of potential tax prosecution led the French Parliament to adopt a more pragmatic approach to criminal enforcement by extending guilty plea and CJIP mechanisms to tax fraud.

Introduced in French law in 2016, the CJIP mechanism proved to be an effective tool for the prosecutor to close cases quickly whilst imposing high financial penalties. A total of 5 CJIPs have been concluded since its entry into force.

The 2018 Tax Fraud Law introduced a matching provision which now allows the FTA to conclude a civil transaction with a taxpayer even when it intends to initiate criminal proceedings against him. Prior to the 2018 Tax Fraud Law, the FTA was prohibited from entering a civil transaction with a taxpayer when it had already filed a criminal complaint against him.

Increase of criminal penalties

The maximum amount of the penalties for the offences of tax fraud and aggravated tax fraud are set by law at €500,000 and €3,000,000, respectively. However, 2018 Tax Fraud Law created the possibility for criminal courts to raise the maximum amounts to twice the income derived from the commission of the offences.

The publication and disseminating of a conviction for tax fraud is now made mandatory by the 2018 Tax Fraud Law unless courts decide otherwise due to the circumstances of the offence and the personality of the offender which must explained the in the decision.

Reinforcement of administrative measures

Some of the administrative provisions of the 2018 Tax Fraud Law are also worth of note.

The tax administration can now publish, subject to the authorization of the Tax Offence Commission, the tax penalties applied to companies for breaches of their tax duties of a particularly serious nature (fraudulent acts or abuse of law and an evaded duty of at least €50 000). The publication is made on the tax administration's website for a maximum period of one year unless the penalties are appealed before administrative courts.

The 2018 Tax Fraud Law created a specific administrative fine to punish professionals who helped taxpayers to commit an abuse of law, to carry out fraudulent activities, to conceal his activity or to omit to declare amounts relating to a trust or life insurance accounts or contracts held abroad. This fine can only be imposed when the FTA imposed a 80% penalty to the taxpayer. The amount of the fine is 50% of the income derived the services rendered and, in any event, cannot be lower than €10,000. This provision targets legal, financial and accounting professionals.

Finally, the 2018 Tax Fraud Law expands the list of Non-Cooperative Countries and Territories (hereafter "NCCT") to jurisdictions blacklisted by the European Union.