French Tax Update - A Comparison Between The French Abuse Of Law And The UK General Anti-Abuse Rule

Author:Mr Siamak Mostafavi, Nicolas André and Charlotte L. Sallabank
Profession:Jones Day

While the abuse of law (abus de droit, « AoL ») has been in place for many years under French tax law, the General Anti-Abuse Rule (« GAAR ») has only been introduced into UK tax law very recently. The present French Tax Update thus extends its reach beyond French tax law, and compares the two, focusing on (i) their scope, (ii) the applicable procedure, and (iii) the way each of the GAAR and AoL operates in practice.



GAAR: The GAAR is a creature of statute and is found in the Finance Act 2013 (Part 5 and Schedule 43). In addition, these statutory provisions are supplemented by Tax Authority (« HMRC ») guidance. The purpose of the guidance is to give a broad summary of what the GAAR is designed to achieve in a non-legal style and also to be an aid to the interpretation and application of the GAAR by discussing its purpose and giving various examples.

All but the procedural section of the guidance has been approved by the GAAR Advisory Panel (an independent panel of voluntary advisers appointed by the Commissioners of HMRC, « GAAR Advisory Panel »). Unusually for UK tax legislation, the statutory provisions explicitly recognize that the guidance is an aid to the interpretation of the GAAR, and any court or tribunal considering the application of the GAAR has to take the Advisory Panel approved parts of the guidance into account. Strictly speaking, a court or tribunal does not have to take the procedural aspects of the guidance (as these are not approved by the Advisory Panel) into account, but can do so if it so wishes.

AoL: As is the case with the GAAR, the AoL is a creature of statute and is specifically provided for by several Articles of the French Tax Procedure Code (Livre des procédures fiscales, « FTPC »).

Article L. 64 of the FTPC, which defines the AoL, was last modified in 2008 in order to take into account a case whereby the Administrative Supreme Court (Conseil d'Etat, « ASC ») held that the AoL procedure could apply to situations which did not technically fall within the ambit of the then-applicable FTPC Article, but could nevertheless be caught by the anti-fraud principle that is generally applicable under French law. As a result, such general anti-fraud principle is now in part contained within the AoL definition (please see « What are the financial consequences attached to the GAAR/AoL? » below).

Unlike the GAAR, however, the AoL definition has now been reviewed by French tax courts for many years. As a result, case law is a very important item in the field of the AoL, and may substantially enlighten the application of the AoL procedure with respect to certain specific transactions (e.g., for recent illustrations, management packages within LBO-type transactions, estate planning, tax-optimized structured financings, etc.). On the other hand, official administrative guidelines issued by the French tax authorities (« FTA ») rarely provide any details with respect to the AoL, and rather refer, in some cases, to case law rendered by the ASC.


GAAR: The GAAR is designed to counter « abusive tax arrangements ». It is intended to catch transactions where the tax outcome does not reflect the economic position of the taxpayer and a favorable tax position has been achieved by applying the tax legislation in a manner, or to a set of circumstances, which was not intended or contemplated when the legislation was drafted. Arrangements constitute « tax arrangements » if the obtaining of a tax advantage was the main purpose or one of the main purposes of the arrangement. Tax arrangements are « abusive » if they « cannot reasonably be regarded as a reasonable course of action » (so-called double reasonableness test).

The GAAR covers specific taxes only, but its reach extends beyond business taxes, the relevant taxes being income tax, corporation tax, capital gains tax, petroleum revenue tax, inheritance tax, stamp duty land tax and the annual tax on enveloped dwellings. (It should be noted that VAT is not covered by the GAAR nor are any other EU-derived taxes—this is because the EU doctrine of abuse of law applies to these taxes.) Examples of indicators of abuse are given in the statute, but this is not an exhaustive list. Essentially, the examples relate to situations where the amount brought in to charge to tax is less than the « economic profit ».

The GAAR is new legislation and has not yet been tested in the courts. When a case is brought, it will be interesting to see to what extent decisions in previous tax anti-avoidance cases will be considered by the tribunal or court. It is generally thought HMRC will seek to apply the GAAR particularly in situations where previously taxpayers have succeeded because the legislation is very formulaically drafted, and if the arrangements fall within the strict formulaic approach of the statutory provisions, albeit in a very contrived way, the courts cannot override this. The GAAR may well enable HMRC to succeed in such situations.

AoL: Unlike the GAAR, the AoL applies to all French taxes without exception.

The procedure essentially enables the FTA to disregard any given legal agreement between the parties and, accordingly, to tax the corresponding transaction on the basis of its actual substance. The AoL potentially applies to two types of situation:

The first situation is one where the relevant transaction is analyzed as being a « legal fiction », i.e., a sham. In practice, this qualification is rarely used by the FTA as the taxpayers generally follow the relevant rules to make sure of the legal effectiveness of their transactions. The second situation is where a given transaction is purely tax motivated, and the parties have obtained the tax benefit by a literal application of the relevant rules while disregarding the spirit of such rules. This second possibility is fairly similar, in spirit, to the basic definition of the GAAR. In practice, it is the one which is most commonly used by the FTA to challenge the transactions they consider as abusive. One famous case law was that of the so-called « Bank of Scotland case » where a UK tax resident bank was receiving French-sourced dividends and claiming, under the then-applicable UK-French tax treaty, the tax credit which was at the time attached to these dividends. The UK bank also had a separate arrangement with the US...

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