French Innovations in International Taxation

The introduction of a new French procedure for foreign companies with a presence in France

Bruno Belouis, HLB France

In June 2013, the Service de traitement des déclarations rectificatives, the famous “STDR”, or "cellule fiscale de dégrisement", was opened. This was a regularisation desk for individuals who have held undeclared assets abroad. After considerable success, the counter was closed on 31 December 2017.

Today, in parallel with the law for a state in the service of a company of trust, known as the ESSOC law, or the DARMANIN law, the French government has set up a new tax regularisation window for companies whose operations are very similar to the functioning of the STDR. This is called the “Service de mise en conformité des entreprises” ("SMEC"), but is open to all companies, regardless of their size.

This service offers new international measures for the benefit of foreign companies and their executives. Indeed, SMEC is particularly advantageous for undeclared activities in France that constitute a permanent establishment. With regard to the taxation of executives, this department is also responsible for the impatriate tax regime.

As with the STDR, however, SMEC can only intervene when the company or manager action is of a spontaneous nature, i.e. excluding companies or managers subject to an administrative or judicial investigation procedure. In practice, the taxpayer interested in this procedure must submit a tax compliance file, similar to the "STDR format".

However, when the case is particularly complex, the situations may be described in the first instance, without first creating a case. Unlike the operation of the STDR, when the taxpayer files a compliance request, they benefit from the same guarantees as those existing in the context of tax audit procedures. After the SMEC has examined the revealed file, in the event of a disagreement, the administration may initiate a tax audit. Where SMEC shares the analysis of the board that revealed this situation, the procedure is closed in the context of a transaction. The taxpayer may be able to pay the additional taxes imposed by this disclosure in accordance with a schedule previously agreed with the tax authorities.

As part of this transaction, the rate of common law penalties of:

  • 80% is reduced to 30% with reduced interest on arrears of 40%.
  • 40% is reduced to 15% with reduced interest on arrears of 40%.
  • 10% is reduced to 0% with interest on arrears reduced by 50%.

Consequently, the conditions proposed by SMEC are very interesting, particularly for foreign companies having or starting an activity in France. Indeed, the latter may consult SMEC as a preventive measure to ensure, for example, whether or not a permanent establishment exists in France for their French activities. In this way, foreign companies ensure that their French tax obligations are in compliance while benefiting from advantageous penalty rates in the event of disagreements.

In the current trend, where the definition of permanent establishment varies from year to year with a case law that is still as rich in this area (see the "GOOGLE" case), we can only congratulate this procedure, which is synonymous with legal certainty for foreign companies with a presence in France.

HLB France was one of the first to request this service on behalf of a German company that has been operating in France for more than a decade as part of its real estate project management business. As it had never been audited and concerned about being in full compliance with French tax laws, the latter asked us whether its activity constituted a permanent establishment in France after the fact. As the situation is complex and not obvious given the facts communicated, we successfully approached SMEC as a preventive measure and are currently in the process of negotiating a transaction with the administration on behalf of this client.

We therefore recommend that any company in a similar situation contact this new service in order to regularize its situation at a lower cost. HLB will be able to assist you in this process and help you to build a solid case.

The consequences of the “GOOGLE” case law

Following a tax search, followed by various verification procedures, the American giant GOOGLE was subject to extremely significant tax adjustments, as the tax authorities considered that its activities in France had escaped both corporate income tax and VAT.

From a strict tax point of view, however, the tax administration's approach had very little chance of succeeding and the Tax Judge had given very clear reason for this analysis, both before the Paris Administrative Court and recently before the Administrative Court of Appeal (TA Paris 12 July 2017 and CAA Paris 25 April 2019).

If, as we know, GOOGLE has since settled and accepted on 3 September 2019 to pay a record fine of 500 million euros under a public interest judicial agreement (CJIP) resulting from the proceedings brought against it by the National Financial Prosecutor's Office (PNF) for "aggravated tax fraud", this decision is, in our opinion, more of a "political" question in the media sense of the term than a "technical" question on the tax level, as the above decisions attest.
This approach will cost nearly one billion euros (i.e., 500 million euros within the framework of this CJIP, and almost 500 million additional euros by the payment of taxes that the tax judge had, however, considered twice as unjustified...) to the Internet giant.

HLB France has recently had to deal with an accounting audit of a tax case similar to the "GOOGLE" case with much smaller, but still significant amounts on behalf of an Irish company whose business is in the sale of communication software. Indeed, the French tax authorities had sent a tax notification against this client considering that the latter actually had a permanent establishment in France either through a fixed base or through dependent agents. Based on the principles in this matter and the latest ‘GOOGLE’ decision of the Administrative Court of Appeal, we replied to the administration that the agents in question did not have the power to bind the Irish company and that they were not legally dependent. In the end, the Administration abandoned its taxation.

The two aforementioned “GOOGLE” decisions therefore retain all their interest, even if being right on the tax level today does not necessarily imply being protected from the judicial courts.

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