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Objet : Tax audit of the computerized accountings: legal and litigation aspects

The regime of the tax audit of the computerized accountings (TACA, French CFCI – contrôle fiscal des comptabilités informatisées) establishes a legal framework convenient to the efficiency of the tax audit. In spite of the apparent complexity of the procedure and the contentious traps, having entailed a number of unfavorable decisions for the Administration, the law offers both to the Administration a vast scope and to the taxpayer a specific guarantee particularly circumscribed. The real guarantees of the taxpayers are the ones which are common to all accounting audits. The procedures of TACA (CFCI) have to fit within the framework of the well-tried methods of tax audit, contributing in the same time to their renewal.

Introduction

The recourse to the computing can only be a lever favorable to the efficiency of the tax audit. Companies produce massively data which exceed the capacities of a manual treatment. In numerous situations, only the appeal to the computing may reveal the error or the fraud: accounting which is neither sincere nor convincing in spite of its regularity in the shape, provisions or unjustified transfer prices. Solely a feeble part of tax audit has recourse to CFCI (approximately 1% on average and fewer than 5% for medium and big companies). The complexity of implementation and coordination of the necessary skills, legal and fiscal on one hand, computing and technological on the other hand, is certainly the main cause of this state of fact.

In spite of its complexity, the legal regime of TACA is favorable to the development and to the efficiency of the controls. It has been modified four times within five years. There are few definitions of the basic terms of the regime – to say what covers the term “computerized accounting ” or “IT processing”. The jurisprudence shows a panorama of some few, isolated decisions the underlying principles of which remain little explicit.

In order to better understand this regime, one should dwell then on the following questions:

1. What is the scope of TACA?

2. In which cases the specific guarantees of TACA apply?

Besides TACA, “classic” tax auditing preserves entirely its relevance.

1. Article’s L.13, IV of TPB(tax procedures book) (French-LPF) field of application

2. The possibility of checking the accountings held by means of computer systems was created in 1982 by introducing the third paragraph in the article 54 of the General Tax Code: “If the accounting is established by means of a computerized system, the control extends to the documentation relative to analyses, to programming and to the execution of processing. To make sure of the reliability of the automated processing of the accounting, the Tax agents can proceed to control tests over the equipment used by the company, whose conditions will be further defined by decree”. But the creation of a specific control procedure intervened only eight years later with the modification of the article L.13 of TPB.

This article defines the field of application of the tax audit concerning the taxpayers compelled to keeping and presenting accounting records. Since 1990, a second paragraph has been introduced which allows auditors to accede “information, data, processing and

documentation “ if accounting held by computing means. Since 1st of January 2014, it is mentioned in a paragraph IV, but its wording remained unchanged for about twenty seven years. It is the heart of the legal regime:

“When accounting is held by means of computing systems, the audit concerns the whole of information, data and IT processing which participate directly or indirectly to the formation of accounting or fiscal results and to elaboration of declarations held as obligatory by the

General Code of Taxes, and also on the documentation concerning analysis, programming and execution of treatments.”.

3. Demarcation test

The aim of Article L.13, IV is to allow the Administration to comprehend the logic of the processing of the accounting information made by a company, in order to trace the different phases leading to the result and to the declarations. Administration ought to be able to collect all necessary information, data, processing and documentation in order to understand the result and the declarations. Therefore, all the general accounting is naturally part of TACA’s field, when held by means of a computing system. Every element, transmitted directly to the general accounting by the computing system, without any manual intervention, is equally part of the field. Thus, companies that use ERP (Enterprise resources planning systems), let in the main part of the information which they handle in the field of the procedure. It is the consequence of the integration of their information system.

3 It will be thus easy for the Administration to show how a module, for example SAP, of logistics (MM), of production (PP), of sales (SD) or human resources (HR) is letting in directly the data it process into the accounting and financial module (FI) and even into the management control module (CO).

Finally, there is a third level – the most delicate in litigation – which is the one of computerized devices producing aggregated data, manually taken over by the accounting or financial information system, without however direct integration.

According to the Administration, the primary datum is the one that contribute to the establishment of accounting records or to the justification of an event or of a transcribed situation in the books, registers, documents, pieces and declarations controlled by the fiscal Administration. The integrated datum is the one resulting from a processing made by the company- manually or by computing – of the elementary datum. The definition is difficult but generally it is not such a daunting question to agree if one is in the presence of a primary or integrated datum.

For example, the accounting held on management software is part of the field (first level). If the cash register software makes data that enter directly into the accounting modules, it makes also part of the field (second level). Otherwise, it doesn’t mean that it is necessarily excluded. If it provides for example some integrated data, which is registered even manually afterwards in the accounting software, the processing is part of the field (third level). If a production or logistics software which is included in an invoicing processing – for example, the company charges every time 10 parts are produced as it produces only to order – this processing is necessarily related to the accounting, if made by computing system (second level) as the operation is realized manually (third level): it makes part of the field.

4. The regime of TACA, as issued by the Statute of 29th of December 20121 treats directly the place of the analytic accounting within the field of the regime (TPB, art. L.13, II). Since 1st of January 2014, if the company keeps an analytic accounting and if its business figure exceeds the threshold of 152,4 millions of Euros for the sales and the half of it for service delivery, then the analytic accounting is part of the field.

For the other companies, i.e. those whose business figure does not exceed the above threshold or those not holding an analytic accounting, the test described above applies. If the management information is purely prospective and it has no connection with general accounting (this will surely interest the auditor), it is not part of the field. Conversely, if the management information has an impact on the general accounting, then it enters the field.

5. To sum up, an element is part of the field every time the Auditor establishes that he is not able to understand or control the result, or if such a declaration is made obligatory by the Code, if he has no access to the information, data, processing or documentation of such points X,Y or Z, notwithstanding the domain to which those points are related and even if it is a module of HR, Sale, Production, Logistics, Marketing etc. or a SI integrated or owner.

1

L.n°2012-1510, 29 December 2012, art.14

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6. The specific case of cash registers – A particularly debated question has been if connected cash registers are the premise for a computerized accounting.

By decision rendered on 9th of April, 20142, the State Council (Conseil d’Etat) estimated that if the general accounting is not held by computing system, then the three cash registers connected between them do not form a computerized accounting.

No computerized general accounting, no auditing of computerized accounting, this seemed to be quite logical… However, even in this extreme case, the field of application of the regime as legally defined is vast enough to question the possible application of a TACA proceeding in various similar cases.

First of all, the Council revealed that on one hand that there was no IT system for the general accounting and secondly that the Administration was not challenging the manager’s allegations that “he would never proceed to the totalization of daily receipts from the three cash registers, not even partially” and that the cash register’s draft would have been be kept manually. Inversely, one would have had some integrated datum that got into the IT accounting system, certainly not computerized, but the Administration killed two birds with one stone: on one hand it proved that it should have access to those processing in order to understand the accounting and, on the other hand, as those processing were computed, it proved the existence of computerized accounting. This is the case appearing in a State Council decision of 29th of October 20123

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7. What are the criteria in order to know when the Auditor can treat a cash register’s data? If no cash register whatsoever or in case of a manual cash register without any data registered, there is no possibility of TACA and the Administration cannot go on the other side of the counter (from an IT point of view).

But a cash register is, as in the case Gamboni, almost always, a computed cash register, as it beholds cash register software. As seen above, the cash register book can be manually kept. But the cash register ribbon is a computed draft of the cash register.

It seemed to follow from the above decision that if the taxpayer keeps a manual draft of the cash register, by confronting this one to the cash register ribbon, which is the same but on IT support, it does not mean that the cash register is computerized. One could accept this small restriction, however surprising, which may not be significant.

Because there is another obvious condition to rule out the possibility of TACA: it should that every other functionality, even the simplest one, of the cash register software not to have been used: no stock management, no orders, no distinction of VAT rates, not even of totalization of receipts from other cash registers. The existence of a cash register book with all the data summed up should legally entail the change of the data to the TACA field. Thus, except for the ribbon, the cash register has to have been used as a non-computerized cash register.

2 CE, 3rd and 8th subsections, n° 369929, 9th of April 2014

3 CE, (author’s note), 9th subsection, 29th of October 2012, n° 352797

5 Finally, one should keep in mind that businesses not justifying their receipts by invoicing, every detail of every sale should be registered in the accounting books. Exception is made for cash sales, that Administration extend – out of pragmatism and convenience- for payments by credit cards and checks, of a total of 76 Euros by customer.

Therefore, if the accounting is not taking over the whole of the elementary data which supposedly should have been included, or if the data are incoherent, following the principle stated above, the Administration is justified in accessing the computerized data in the cash registers and consequently process them. This last point generates however some hesitation.

In short, the test established by the legislator allows a vast comprehension and one simple justification of the application field of the regime and solely few data remain outside if the company uses IT. That is why the trap of the exit of the field, if it exists, is not an inherent important risk in regimes of the TACA.

Respect of the specific guarantee accorded by law to the taxpayer, object of a processing request, in application of the art. L.47 A II of TPB, is the second apparent trap of the regime. The specific guarantee to TACA (TPB, art.L.47 A, II)

8. The article L.47 A, II of TPB gives the possibility to the Administration of auditing accountings by proceeding to processing.

The law offers to the taxpayers a guarantee consisting in the choice of one from the following three modalities:

– the Auditor performs the processing directly on the taxpayer material;

– the taxpayer carries out the processing for himself;

– the taxpayer gives to the Auditor the necessary files in order for the latter to perform the processing outside the business.

The reason behind this guarantee was to prevent paralyzing the business’s IT system during the tax audit. But this is a major procedural risk for the Administration. The compulsory delivery of accounting records file (ARF, French-FEC), starting as of the 1st of January 2014 (TPB, art. L.47 A, I), even though it allows to better circumscribe the guarantee doesn’t modify its substance.

Let’s illustrate the risk during litigation, by means of an example. In its decision of 24th of August 20114, the State Council stated that the Auditor having used the functionalities of the cash register software of the business, not connected to the accounting software, had performed an IT processing that would obliged him to previously inform the SARL of the different existing options. The State Council annulled the Court of appeal’s decision and discharged the SARL on the whole of its tax impositions.

Therefore it is crucial for the Administration to know when to propose the three modalities of processing above, on one hand to prevent paralyzing the audit by some time-consuming writings or exchanges, as every processing request is object to formalization by the

4 CE, 10th and 9th subsections, 24th of August 2011, n°318144

6 Administration and of the taxpayer’s choice, and on the other hand to secure the procedure. The ideal is for the guarantee to be systematically proposed and as widely as possible.

9. The test to know when the guarantee should be granted is the “processing”. The Law specifies that the test is the “processing” itself. If the Auditor wants to perform a processing, he will apply art. L.47A, II and grant the guarantees attached, namely the three processing modalities above. No processing means no specific guarantee.

Therefore, one should distinguish between:

– Is there the case of computerized accounting (TPB, art. L13, IV and TPB, art. L.47 A) or not? On this question, see n°3 above;

– If yes, is there the case for a processing request (TPB, art. 47A,II) or not (so then TPB, art. L.47, A, I)?

By its decision of 23rd December 20105, the State Council had clearly reminded that the guarantee provided by art. L.47 A, II is applicable only if the Administration wants to proceed to a specific processing ad hoc, on the basis of the business’s IT system.

From now on, the article L. 47 A, I of TPB obliges the taxpayer to give the ARF, but the guarantee linked to the processing does not apply, as the Administration can only perform sorting, ranking and calculations on the ARF. Thus, it is necessary to distinguish between “processing” and “calculation, sorting, ranking”, as the term “processing” has different meanings, whether is the Administration or the business that perform it.

10. Distinguishing between “processing” and “calculation, sorting, ranking”. The article L.47A, I of TPB states that “Administration can perform sorting, ranking and anycalculation in order to ensure there is a matching between the accounting records and the

fiscal (income) declarations of the taxpayer”. This article is combined with art. 102 B of TPB, which obliges the taxpayer to collect the whole of primary data in an electronic form. The ARF needs to allow the tracing of the history of all accounting movements such as orders, deliveries, stock movement, invoices, cost prices, sale prices, amount of the subscriptions, withdrawals (direct-debits), and securities transactions. Inevitably, the consequence is the following: if the Auditor makes sorting, rating and calculations on the basis of the elements that the taxpayer is bound to keep at the

Administration’s disposition, then there is no processing. Processing is therefore an operation more complex than sorting, ranking or calculations. A large part of so-called “processing” are in fact solely operations of sorting (and even less, as IT specialists, familiar with the “Turing” machine, know it so well).

There are many cases where the Administration has simply performed a “matching control” (contrôle de concordance) (as the term appears in the regulation) and discussed it afterwards in an oral and adversarial debate with the checked person, without being a processing.

5 CE, 9th and 10th subsections, 23rd of December 2010, n° 307780

7 Except for the cases when the Administration had explicitly and directly placed itself within the scope of the article L.47 A, II, the judge has to determine if terms as “requests” (“requêtes”) or “specifications of extraction criteria” (“spécifications de critères d’extraction”) constitute a processing or simply operations to obtain the data that is sorted afterwards for the “matching control”, terms that send to I. As the business is required to keep the ARF (FEC) available, a large part of the uncertainty has now disappeared, as the Administration is able to perform by itself its sorting, ranking and calculations without claiming anything else from the taxpayer, on the basis of the provided elements, whenever it may deem it appropriate.

11. Distinguishing between business’s processing (TPB, art. L.13, IV) and Administration’s processing (TPB, art.L.47 A, II).- As seen above, the business that keeps computerized accounting performs itself the necessary processing for the determination of the accounting or fiscal result and the production of declarations and processing that it is bound to keep available for the Administration.(TPB, art.L.13,IV)

It is thus necessary to distinguish the processing of the company and those of the administration:

-the processing of the company are management rules of the data and the files implemented in computer programs having a direct or indirect incidence on the determination of the accounting or fiscal results;

-the processing asked by the Administration are not management rules but an investigation, a control by the Administration which implies the use of the taxpayer’s computing system or the making of a computer program put into production in the taxpayer’s IT system. ,Unfortunately for the clarity of the regime and the certainty of the procedure, when the Administration wishes to simply identify a processing implemented by the business in the sense of a “management rule”, it uses the word “processing”.

Another case, a mixed one, is when the Administration, during the TACA, is controlling the processing performed by the business itself, when the latter has opted to perform itself the processing wished by the Administration.

The Administrative Court of Appeal of Versailles has judged that such a control was a processing following a non-optional method and thus violating the guarantee. The State Council has censored it in a decision dated of 20th of November 20136, as the Court of Appeal omitted to check out if the processing had been realized with the taxpayer’s material or software. The Council followed the Public Rapporteur’s conclusions who, after revealing the origin of the guarantee, has underlined that censure is needed only if the Administration has recourse to the business’s IT system.

This criterion is perfectly justified, even though it is only a necessary condition of the existence of a processing, and not solely a sufficient one, as seen above because of the specific characteristics of the guarantee and of the processing.

6 CE, 9th and 10th subsections, 20th of November 2013, n°334896

8It seems that the area of the guarantee is particularly restrained insomuch of questioning if the legislator had foreseen every possible consequence of the regime as it was created and

modified. Faced with the inefficiency of the regime between 1982 and 1990, without any ad hoc procedure, the legislator had eventually conferred powerful means of investigation to the Administration.

As the field of application of the TACA is quite vast and the specific guarantee is quite slim, it is fundamental that taxpayers benefit of traditional guarantees attached to all tax audit procedures. The relevance of the complement of a “classical” audit

12. The research of the “reality” by exploiting only the data obtained from the IT system, cannot replace traditional methods of extra-accounting reconstitution of receipts which is based on the real conditions of business’s exploitation.

Example 1: the Administration performs processing on the cash register software of a pizza delivery shop. Generally, the pizza is delivered within half an hour of the order. The date and hour of the order and the date and hour of the delivery appear in a file. When delivery’s date does not appear, the system takes on the date of the order and adds thirty minutes.

As the shop has three locations, another file takes over the date of the order, the location code and the ticket number of the delivery. A processing request allowed to the Administration to realize that, in the second file, numerous orders were posterior of their delivery, which meant that tickets have been modified afterwards.

By censing the whole of the modified tickets and comparing them with the others, it found a more important number of offered and some amounts invoiced feeble in absolute value. Then, by crossing the files, the Administration was able to replace the modified date of the order with the real restored one. It compared the percentage of free-of-charge in the two groups, roughly 75% in the modified tickets and 35% in the normal ones. In order to restore the receipts, it crossed the sales with the registered payments, the difference being considered as the dissimulated business figure.

The interesting point is to see that the computerized accounting was the only means to realize that the accounting was not sincere and to allow restoring the receipts, but this restoration of the receipts should have been made by classical means drawn from the real exploitation of the shop. Example 2: in a car renting shop, IT processing allowed the Auditor to realize that some vehicles were provisioned whereas the sale itself of the vehicle intervened before the closing, or the sale has been done without any loss. By this approach, he finds that provisions are approximately 30% superior to the reality., Evidently, if the vehicle is resold before the closing of the exercise, one needs to take into account the sale price and note the “cote argus”. But when discount is based on “argus” of an used car whose listing is inferior of the purchase price, an ulterior sale superior to the “argus” is not sufficient in itself to call into question the provision. This is a basic rule of provisions. Thus, the elements provided by the processing should take into consideration the closing date.

9 IT allows analyzing provisions for thousands of parts, better identifying the statistical analysis of the risk of obsolesce. One should remember that the provision corresponds to the risk of the shop of not finding a buyer for an article become obsolete that must be put to the scrap, and that the only fact of the resale with a loss inferior to the estimated one is not by itself sufficient to call it into question neither in its principle nor in its amount, which means that one should refer to the traditional principles of Tax Law.

13. Generally speaking, the processing performed during the TACA, must be accompanied by a grammar. Its syntax will be constituted by time-tested methods inspired by those done in other audits by integrating the new possibilities offered by IT and the possibility of processing a large amount of data. Its semantics should express itself in clear, usual terms drawn from businesses’ activities. Enhancement cannot be justified only by the crossing of data and files. If TACAs will necessarily allow the development of new methods of reconstitution of taxpayers’ tax bases, they must also be debated in a meaningful way by those interested.

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A new procedure for fiscal control, which is an intermediary between the document control and the accounting verification, is introduced. The Administration may thus, when taxpayers compelled to keep and present accounting records keep their accounts by means of computerized systems, examine this accounting without going to the spot after the taxpayers have transmitted to them their files of the accounting entries (“fichiers des écritures comptables”, hereinafter “FAE”).

Failure to transmit “FAE” on time and in accordance with the terms and conditions shall result in the imposition of a fine of 5,000 €. This procedure shall apply from December 31th 2016.

I. CURRENT REGIME

1. Right of control – At least since the entry into force of Decree No. 48-1986 of December 9th 1948 on the tax reform of direct taxes, indirect taxes, registration fees and transfer taxes, the tax authorities have one Right of general control, codified today in article L 10 of the Book of

Fiscal Proceedings (“Livre des Procédures Fiscales” hereinafter “LPF”). According to this text, “The tax administration controls the declarations as well as the acts used for the establishment of taxes, duties, taxes and royalties.

It also controls documents filed in order to obtain deductions, refunds or reimbursements, or to pay all or part of a tax by means of a claim on the State. To that end, it may ask to the taxpayers any information, justification or clarification relating to the declarations subscribed or the deeds filed. The provisions contained in the charter of rights and obligations of the audited taxpayer mentioned in the third paragraph of Article L. 47 are opposable to the administration.” This text in particular, among others, authorizes the Administration to implement the “control on documents”, as is regularly qualified in the annual management reports of the Directorate- General for Public Finance (“Direction Générale des Finances Publiques”, hereinafter “DGFiP”).

2. Control on the basis of documents – Applied to firms and individuals, the control on the basis of documents consists of all the office work during which the department reviews the statements using the information and documents contained in the various files it has, and, where appropriate, establishes the justified raises or tax deductions.

It does not require any prior information from the taxpayer who is subject to it and, where an firm is concerned, any travel to its premises is to foresee. If the examination of the file reveals discrepancies between the different elements of the file, the service may ask the taxpayer in writing for additional information, justification or clarification on the basis of Article L 10 of the LPF.

If the discrepancies in the file appear to him to be sufficiently precise, the service may send the taxpayer a proposal for rectifications. In the absence of discrepancies, he will close the control without informing the taxpayer who will thus ignore the attention paid to his file by the DGFiP.

3. Accounting verification – Where applicable, if the control on documents has failed to regularize, from the office, the taxpayer’s situation, the audit of accounts, where the taxpayer is compelled to hold it, constitutes the logical follow-up of the control on documents.

Unlike the latter, the accounting verification is an on-the-spot verification by the officials of the administration of the accounting and accounting documents of the taxpayers who are required to keep them.

Where accounting is carried out using computerized systems, a specific procedure is provided for (LPF, Article L. 47A, I), in which taxpayers are required to remit to the auditor, at the beginning of the control, the file of the files of the accounting entries.

II. NEW REGIME

4. Article 14 of the Amending Finance Law for 2016 (“Loi de Finances rectificative pour 2016”) introduces a new procedure of fiscal control, which is an intermediate between the control on documents and the accounting audit.

While many observers were awaiting the gradual introduction of an annual FAE deposit obligation in the same way as the income tax returns, the legislator opted for a solution more pertinent avoiding to clog the computer servers of the DGFiP with files which would not be used in their entirety.

3 There is an annual average of about 45,000 accounting audits : if we relate it to the number of companies in France, which is about 3,400,000, we obtain an “accounting audit attendance rate” of DGFiP of 1.3%.

This rate has been stable over the past few years and is unlikely to change, except to increase the number of auditors, because the audit of accounts is greedy in human and material resources as soon as it takes place on the spot and it is no secret that the Administration has long sought to control and reduce its costs. By introducing a new tax audit procedure midway between document control and accounting audit, the legislator accompanies the DGFiP in this search for cost reduction while granting it the possibility of maintaining or even increasing its presence in fiscal control through the automation of a part of its approach and its analytical work.

Close to the control on part, the new procedure constitutes a new mode of remote control. This new method of control will not, a priori, be applied to companies that present high risks or whose size and complexity of subjects would require an on-the-spot verification.

From this point of view, the new accounting review system should be compared with Decree No 2016-1356 of October 11th 2016, which provides that:

– the approved management centers (“centres de gestion agréés”) (CGI, Section II, Article 371 E),

– the approved associations of liberal professions (“associations agréées des professions libérales”) (CGI, ann. II, Article 371 Q),

– the joint management certified bodies (“organismes mixte de gestion agréés”) (CGI, Ann. II, Article 371 Z sexies),

– professional accountants (“professionnels de l’expertise comptable”) (CGI, ann. II, Article 371 bis F),

Control the ability of their members or clients to comply, where appropriate, with the obligation to create and make available to the DGFiP the FAE at the beginning of each accounting audit and therefore a fortiori in the context of an accounting examination.

However, the DGFiP may also decide, for example, to apply the accounting examination to companies falling under the competence of the French National and International Audit

Department (“Direction des vérifications nationales et internationales” or “DVNI”) or Fiscal Control Department ‘”Direction de contrôle fiscal” or “DIRCOFI”) whose accounting verification would not have been considered as a priority for more than 3 years. This would enable it to confirm its analysis or, on the contrary, to convert the examination into a full accounting verification.

Note: The French Constitutional Council (“Conseil constitutionnel”) has received a complaint alleging that, by permitting the taking of documents and questioning of the taxpayer’s declarations without ensuring respect for the oral and contradictory debate, the new system undermined respect of the rights of the defense.

However, the Council considered that “the impugned provisions allow the administration to obtain a copy of the records of a taxpayer’s accounting entries in order to conduct an accounting examination. On the other hand, they do not endow it with a power of forced execution to obtain its reissue. Consequently, those provisions do not deprive the taxpayer of the guarantees provided for in the LPF in the event of the exercise by the administration of its 4 right of supervision, do not infringe the rights of the defense or any other Constitutional requirement” (Constitutional Council, Dec. 29th 2016, No. 2016-743 DC, Amending Budget Law for 2016, § 13 to 17).

5. Entry into force

In the absence of precision in the text, the new procedure enters into force on 31 December 2016 (the day after the publication of the law in the Official Journal).

A. New accounting procedure 1° Relevant taxpayers

6. The law now provides that, under the conditions laid down in the LPF, officials of the Administration can, when contributors required to keep and present accounting documents keep their accounts by means of computerized systems, examine this accounting without going on the spot (LPF, article L. 13 G new).

2° Conduct of the procedure

7. Preliminary sending of a notice of accounting examination – The accounting examination shall not be initiated unless the taxpayer has been informed of it by a notice of examination of the accounts (LPF, Article L. 47 (1) as amended).

This notice must contain the same information as a notice of audit of accounts (years subject to verification, the right to be assisted by a counsel of his choice, the possibility of consulting or remitting the charter of rights and obligations of the taxpayer checked).

8. Presentation of the FAE – Within fifteen days of receipt of the accounting examination notice, the taxpayer must send the Administration a copy of the FAE, in a dematerialized form meeting the standards set out in Article A. 47 A-1 of the LPF (LPF, Article L. 47 AA new, 1).

This timeframe is very short and virtually untenable for many companies that would not have anticipated the production of FAE for the fiscal years covered by an accounting review notice.

This is why we strongly recommend that taxpayers involved in FAE production generate them regularly after each year-end and check:

 that they will be exploitable under normal conditions in the event of control (technical validation),

 that their content complies with the accounting standards laid down by the French Commercial Code and that it corresponds to that of the tax declarations (corporate tax, VAT, etc.) subscribed to elsewhere (accountable and tax validation).

9. Operations by the Administration – As soon as the FAE has been communicated to it, the Administration may carry out sorting, classifications and all calculations on the files of the accounting entries. On the basis of their examination, it will be able to question the

contributor and ask him for information, justifications or clarification to characterize any anomalies detected.

As part of its responses to these questions, the taxpayer may be required to provide the Administration with additional information in the form of files.

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The latter can then apply computer processing to them without applying Article L. 47 A, II of the LPF (LPF, art, L. 47 AA new, 3).

10. Follow-up of the examination – At the latest six months after the receipt of the copy of the FAE, the Administration shall:

 send to the taxpayer a proposal for rectification;

 inform him of the absence of correction (LPF, Article L. 47 AA new, 4)

11. An obligation to provide information on the results of the examination is also provided for in Article L. 49 of the LPF.

Furthermore, at the latest when the correction proposal is sent, the Administration must inform the taxpayer of the nature and results of the computer processing operations which give rise to improvements (LPF, Article L. 47 AA New, 5). This obligation is confined to the assumption that the Administration requested additional information in the form of files.

12. As in the case of verification of accounts, the Administration must indicate in the proposed rectification the amount of the duties, taxes and penalties resulting from these corrections (Article L. 48, paragraph 1, as amended).

13. Before the assessment or before informing the contributor of the absence of rectification, the Administration will have to destroy the copies of the files transmitted (LPF, article L. 47 AA new).

14. If the accounting examination concerns a small company, the Administration must reply to the comments of the taxpayer within sixty days, otherwise the failure to notify a reply within that period will be equivalent to acceptance of those comments ( LPF, S. 57A, amended I).

15. In general, when the conditions are fulfilled, the adversarial procedure will apply and the possibility of a dialogue between the Administration and the company will be preserved. The exchanges between the taxpayer and the Administration will be carried out in writing and / or

orally during the procedure. Furthermore, if the supervisor maintains all or part of the rectifications envisaged, the taxpayer will be able to rely on his superior for further clarification.

Similarly, at the end of this procedure, the departmental or national commission of direct taxes and turnover taxes will be competent in the event of the implementation of the inter partes hearing procedure on questions of fact of its competence.

16. The taxpayer may prefer to request, within 30 days of receipt of the proposal for rectification of errors, inaccuracies, omissions or inadequacies in the declarations taken within the deadlines be corrected for the taxes on which Carries out the accounting

examination, subject to the payment of a default interest equal to 70% of the normal late payment interest (LPF, amended Article L. 62). Note: 1) The request for regularization is also possible in the event of an audit of accounting, but the taxpayer must make the request before any proposal of rectification. In the context of the accounting examination, the 30-day deadline after the proposal for rectification is justified by the fact that, unlike on-the-spot controls, it does not allows the taxpayer to make its observations “in real time” to the auditor.

2) Regularization, which is not possible in cases of exclusive bona fide offense, shall be subject to the filing of a supplementary declaration within thirty days of its request and to the payment of the interest and late payment due at the date of filing of the declaration, or at the deadline for payment on the assessment notice in the case of assessment by way of roll.

3° Articulation with other control procedures 17. Articulation with the personal tax situation examination (“examen de situation fiscale personnelle”) – As in the course of an accounting audit, the Administration may, during theaccounting review, examine transactions in financial accounts used for both private and professional purposes. It can also request clarification from the taxpayer, or justifications for such operations without this examination and applications constitute the start of a personal tax situation examination (LPF, Article L. 47 B, paragraph 2, as amended).

The Administration may take into account, in each of these procedures, the findings resulting from the examination of the accounts or the replies to requests for clarification or justification and made under the other procedure in accordance with the rules applicable to the latter (LPF, Article L. 47 B, paragraph 3).

18. Prohibition of cumulation with an accounting control for the same period – The law now provides that when the accounting verification or the accounting examination for a given period in respect of a tax or a group of taxes is completed, the Administration won’t be able to carry out a verification or examination of the same entries in respect of the same taxes and for the same period (LPF, article L. 51 amended).

The list of exceptions to the prohibition of non-cumulation is adapted to take account of the introduction of the new examination procedure.

In particular, exception will be made to non-cumulation:

– where the audit or examination of accounts has been limited to specific transactions

– in the case of verification or examination of the accounts of parent companies of integrated tax groups.

Important: Thus, as long as it is not completed, there is nothing to prevent the evolution of an accounting examination to an audit of accounts, under the conditions of ordinary law.

B. Sanctions in the absence of provision of FAE or non-compliant FAE

19. Failure to transmit FAE on time and in accordance with the procedures provided for shall result in the imposition of a fine of 5,000 € (CGI, Article 1729 D, II new). In addition, the accounting examination may be canceled (LPF, article L. 47 AA new, 2), which authorizes the Administration to undertake an on-the-spot accounting audit covering the same period, under the conditions of common law.

fichier à telecharger:
170125 Introduction of a distance review procedure

Elimination of double taxation on international flow, which is the main purpose of bilateral tax treaties, is not perfectly achieved in several situations. The recent changes of case-law highlight again the fact that that the solutions found over time concerning elimination of double taxation deserve to be harmonized, under the leadership of the judge, or even, of the legislator.

1 – Most of bilateral tax treaties signed by France provide for beneficiaries of foreign source passive income (dividends, interests, royalties) the allocation of a tax credit on the French tax, corresponding to the tax collected in the source State, within the limit of the conventional rate.

In a recent decision Faurecia1, the Conseil d’Etat stated that the tax credits linked to foreign source income that are not set off by a company subjected to corporate tax on French tax are not refundable.

This decision permits us to examine the several issues at stake concerning elimination of double taxation on foreign source passive income:

– Does a withholding tax collected abroad on a passive income always give the right to a credit tax that can be set off against the French tax?

– What are the mechanisms that limit the amount of credit tax that can actually be set off against the French tax?

– When the creditor settled in France isn’t able to use all or part of the relevant credit tax, can he benefit from a reimbursement or from a deferral of the credit tax not set off?

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– Alternatively, can he note an expense deductible from the taxable base up to the withholding tax amount not offset by the set off of a credit tax?

– What about the situations in which the withholding tax is levied in the other State in violation of the conventional provisions?

The answers to those questions mostly result from case law which made a fragmented, partially incomplete and sometimes unsatisfactory precedent, regarding the desired purpose of the bilateral tax treaties, i.e. the elimination of double taxation.

1. Withholding taxes on foreign source income levied according to tax treaties.

A. The amount of foreign credit tax is limited, according to the “stopper rule” (“règle du butoir”).

2 – Most of tax treaties signed by France provide for beneficiaries of foreign source passive income the set off, against the French tax due to this income, of a tax credit corresponding to the tax actually levied in the source State, within the limit of the conventional rate. More seldom, the tax treaty provide a tax credit at a rate globally set and that can exceed the amount of the withholding tax (“fictitious” tax credit).

According to the “stopper rule”, the tax credit is limited to the portion of the French tax (at the common law rate or at the reduced rate, plus the additional contributions) corresponding to the income leading to a set off. The stake is therefore to determine the income, net of the expenses that have to be deducted according to French lax, for the calculation of the “corresponding French tax”.

As a matter of principle, the method to use is the one of the direct allocation of the expenses to the income leading to a tax credit. Concerning the investment income (“revenus de capitaux mobiliers”), the scope of the expenses that have to be set off against the foreign income could still be discussed. The tax administration wants to deduct from this income, the totality of the expenses linked to the acquisition, the maintaining and the selling of the asset that is the income generator, according to article 39 of the French tax code (CGI). However, the Conseil d’Etat, in a notice given by the Finance

Section2, only takes the custody fees (“frais de garde”) and the collecting costs (“frais d’encaissement”) ; he rejects the global approach wanted by the tax Administration and therefore refuses the set off of the loan interests relating to the acquisition of the assets that are income generator. More recently, the Conseil d’Etat, in a case of purchase-resale of shares around the ex-date (“autour de la date de détachement du coupon”), dismissed the restrictive analysis of the expenses to be decuted proposed by the Finance Section and considered that the provisions of article 39 of the CGI had to be applied3

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However, the practical scope of those divergences has to be relativized. First, a specific anti-abuse system is likely to be applied since 2011, when the companies make purchase-resale of shares around the ex-dates (article 220, 1, a of the CGI). In this

3 situation the financial expenses incurred for the acquisition of the shares, and the capital loss on sale and/or the retrocession given to the seller of the shares according to the contract between the assignor and the buyer, have to be deducted for the calculation of the capping set off of the tax credit – except cases where the safeguard clause (“clause de sauvegarde”) applies. Besides, the “stopper mechanism” only applies, concerning dividends, only to products that do not benefit from the “parent-subsidiary” regime (“regime mère-fille”). Indeed, for dividend under the regime of mother companies, the tax credits cannot be reused if this is a tax-free dividend. Nor cannot they offset on the tax relative to the share for fees and expenses (“quote-part de frais et charges”), not considered as a partial taxation of the dividend, but as a global method of exclusion of expenses linked to the acquisition of the exempted income4

Concerning interests on debts, the amount of expenses to be deducted from the interests levied should be limited to expenditure on management and collecting, except for situations of back-to-back financing.

Finally, concerning the foreign source royalties, the principle is the direct allowance of the expenses made for the levy of those revenues. This method can and has to be favoured by the beneficiary of the income, as soon as the tools of supervising and management permit it.However, in order to avoid the difficulties that can arise an exact ventilation of the exploitation fees between the foreign source royalties and the other categories of operating revenues, the tax administration accepted that the affectation should be achieved by allocating the operating net income to the extent of the gross amount of royalties coming from a State compared to the total revenues of the company5

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B. The tax credit could not be offset against the French tax, in the base in which the corresponding revenues have been included.

3 – Case law strictly considers, that it follows from Article 220 of the CGI that a tax credit can only be offset against the portion of the corporate tax, at the common law rate or at the reduced rate, which applies to the considered income. In other words, a tax credit attached to income subjected to the corporate tax common law rate cannot be set off against the amount of corporate tax at reduced rate possibly owed by the company6, and vice versa7. This approach seems questionable as Article 220 of the CGI aims at calculate the cap of tax credit but does not provide the terms of use of the capped tax credit. In any event, according to the actual case law, in the case of an absence or of a lack of tax owed by the company, the residual tax credit would be written off (“tomberait en non valeur”). The withholding incurred abroad would therefore be, in proportion to the tax credit not usable, deductible from the taxable bases only when the applicable conventional provisions do not prohibit such a thing.

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C. A tax credit concerning a debt remaining uncashed at the end of the fiscal year can be directly offset on the tax considered for this fiscal year.

4 – Finally, a last restriction to the use of tax credit has to be considered, linked to the delay between the income accounting giving right to the tax credit (that leads to the due of corporate tax at the end of the fiscal year) and the payment of the considered income (which is the operative event of the withholding tax and entitle to the tax credit). Regarding those principles, the entitlement to a tax credit may not yet be born at the date of the end of the fiscal year of taxation of a debt of a foreign source income. In this case, the tax should, in principle, be calculated without the offset of a tax credit, and then given back later on on the basis of a claim by the taxpayer after payment of the foreign withholding tax that is the compensation of the tax credit.

However, by way of simplification, the Administration admits, as a practical guideline, a method consisting in pairing, by advance and under subsequent control of the Administration, the income that benefited from a tax credit calculated according to the provisions of the tax treaty between France and the source State8

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D. A loss-making company, that cannot use foreign tax credit, won’t be able to obtain the reimbursement…

5 – This is what is said in the Faurecia decision of the Conseil d’Etat, in which the judges decided that tax credits relating to withholding tax collected abroad, not offset on the French tax notably because of the deficit situation of the taxpayer, cannot be refunded.

The company asserted, in support of its reimbursement application, the fact that the mechanism of tax credit offset in only a method of reimbursement of the debt owed by the French Public Treasure (“Trésor Public”) and therefore, there is nothing to argue against their repayment in cash. However, the Conseil d’Etat assessed that it does not result “from the provisions [of the tax treaties], nor from any provision or any principle of national law that the tax credit that could not have been set off has to be returned by France to the resident beneficiary of those revenues”.

The submissions of the public prosecutor (“rapporteur public”), Edouard Crépey, highlight two arguments in favour of the rejection of the return of foreign tax credits. First, it is recalled that “the subsidiary possibility of a reimbursement in cash is not attached to the tax credit mechanism”, but that it should be relied on the text that deals with the tax credit to know the treatment that needs to be done. Indeed, in national law, several tax credits, of which the rules of use have been planned by the legislator, on a case-by-case basis: thus, some tax credits are refundable, others are deferrable, and others ones are lost because of a lack of set off. Furthermore, it is highlighted the existence of a principle of literal interpretation of the tax treaties that the Conseil d’Etat applies in the case in point: thus, if this is true that one of the purposes of bilateral tax treaties is to eliminate double taxation, this purpose can only be achieved if the relevant tax treaty actually provides for this absence of double taxation.

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E. … nor deduce from its taxable bases in France the amount of the foreign withholding tax, if the applicable tax treaty precludes such a possibility.

6 – The question of the deductibility of foreign withholding taxes, in the case of the non-use of the relevant tax credit, has led to several disputes almost concomitant, to numerous comments and has been widely been discussed.

It results now from the Conseil d’Etat case-law that the foreign withholding tax is not deductible, when the clear provisions of the applicable tax treaty precludes such a possibility9

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This is the case, in the case Céline, of the tax treaties signed by France with Italy and Japan. By analogy, this is the case, more widely, with numerous tax treaties signes by France. It does not result explicitly from this decision that the deduction would be granted, conversely, in the case in which the tax treaty would not include an explicit prohibition on this point. However, the Versailles Administrative Court of Appeal (“Cour administrative d’Appel de Versailles”) decided in this way, concerning a French company earning royalties of Greek.

. As the Administration did not file an appeal in to the Court of Cassation (“Cour de Cassation”), we can legitimately consider that this solution has been endorsed. On this basis, it results from the main tax treaties signed by France that only withholdings tax levied on royalties in a limited number of countries can lead to a deduction in France, when the conventional tax credit cannot be used:

2. Withholding taxes levied in breach of conventional provisions.

7 – This situation can include several realities to which are faced companies in the context of their international trade relations:

– A withholding tax is levied by a State pursuant to its national law, in breach of the tax treaty convention –for instance, on a class of income for which the bilateral treaty give an exclusive taxation right to the residence State) ;

– A withholding tax is levied by a State because of an extensive interpretation of the definition of an income submitted to a withholding tax given by the treaty. Indeed, we know that the definitions of the concepts of royalty and dividend can lead to a disagreement of interpretation. Some States, for example, call it a royalty a payment given for an operation that is not a skills transfer, but is limited to technical assistance service or the provision of qualified staff ;

– A withholding tax is levied according to the allocation terms of taxing power provided by the tax treaty, but at a higher rate than the maximum rate provided ;

– Some States have created withdrawals for which the company is neither the liable, nor the debtor, even though it bears the charge on an economic plan. The main examples we can note are the following ones:

– The withholding tax at a rate of 24% levied in Algeria on service deliveries made by an agent located in France for a client located in Algeria (withholding tax on income tax (“impôt sur les bénéfices”), tax on professional activity (“taxe sur l’activité professionnelle”) and VAT) ;

– The withholding tax at a rate of 10% levied in some cases in China on the corporate gain made by the transfer of shares of a foreign intermediary company owning a participation in a Chinese company ; this text is applied by Chinese authorities in breach of the tax treaty between France and China, of which the substantial participation clause should only apply for a direct transfer of shares of a Chinese company by an shareholder located in France.

– The dividend distribution tax of a rate of 20,358% levied in India on the dividend distributions realized by resident companies for their shareholders, whether they are resident or not.

We can note that France could also be blamed on this point. Especially, the contribution of 3% on the revenues allocated provided by Article 235 ter ZA of the CGI, could be considered as not compliant to the conventional provisions, as it can be analysed as a dividend taxation contrary to some tax treaties concluded by France.

8 – The French company that bears a foreign withholding tax levied in breach of the relevant tax treaty does not benefit from a tax credit in France. In the alternative, we therefore look at the deductibility of the foreign withholding tax, the question is to know how a tax treaty which expressly provides the prohibition of deducing the withholding tax in the residence State, can apply to the French taxpayer, while this tax treaty is not respected by the source State.

Following the Céline decision, the Administration considered that the deduction is forbidden, when the tax treaty expressly provides so, even when this treaty is not respected by the source State.

7 The administrative court of Montreuil finally ruled on this question, considering that the deduction of the foreign tax of the taxable results of a French company would be in any events granted, when the foreign tax has been levied in breach of the tax treaty11. Indeed, the provisions of the clause relating to the elimination of double taxations which, in some treaties, prohibit this deduction would only apply to revenues considered as taxable or not taxable “in accordance with the provision of this Treaty”, according to the terms laid down in most of the treaties.

According to our information, the tax administration would have changed its position in the context of tax controls, following this decision.

Conclusion

9 – The tax treatment of withholding taxes and conventional tax credits on foreign passive income has been forged over time by case law. This Praetorian construction is based on the appreciation made by the judge concerning the articulation of the rules of French national law and of the conventional provisions.

The last decision of the Conseil d’Etat (the Faurecia decision above-mentioned), saying that the tax credit that cannot be set off, cannot be refunded to the French taxpayer, illustrates again the limits of the tax payers to ensure the neutrality of international flows. Another issue, not yet decided by the judged but evoked by the public prosecutor in this case seems important though: the possibility to delay the use of foreign tax credits in the time. And, on this aspect, it is interesting to note that the legislator considered, some years ago, to include in the French General Tax Code a delay mechanism of conventional tax credits over a two-year period, coupled by an acknowledgement of the tax credit to be lost at the end of the delay period12

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Nicolas BRAHIN

Avocat au Barreau de Nice

nicolas.brahin@brahin-avocats.com

fichier à telecharger:
Looking for elimination of double taxation on international flows_papier en tête

Have you foreseen to take over a company which is chargeable to corporate tax? Have you thought about another transaction more interesting than a simple corporate buyout: to create a takeover holding? Which benefits?

1. LBO : a common transaction

1. The buy-out by the holding company

Today, the usual way to buy-out a company, more precisely a SMEs (“PME” or “Petites et Moyennes Entreprises”) is to adopt a plan that involves a holding, especially when the purchaser partly finances this acquisition.

In this plan, the purchaser doesn’t buy directly the target company (“société cible”) but the buy-out is made by the intermediary of a holding, specially created for the acquisition.

2. The functioning

In order to buyout a company, a holding takes a bank loan.

The dividends shared out by the target company, allow the holding to be able to honor the loan due date.

This operation is known as LBO, “leverage buy out” which refers to the funding of the operation by the acquired company itself.

3. LBO into practice

It is common that the buyer bring into the acquired company business an asset of 25% to 30%.

Thus, thanks to this particular operation, a contribution of 250 000 to 300 000 euros will be enough to acquire a company whose value corresponds to 1M euros.

The remaining amount will be borrowed by the holding.

This kind of operation gives some obvious financing facilities but also significant tax breaks.

2. The tax benefits derived from the LBO

1. Interests exempted from tax levy

The classic buyout operation refers to the situation that the buyer as a natural person gains directly company issued equity.

The interests derived from the acquired company are taxed relatively heavily.

A progressive tax schedule based on 60% of the revenues distributed is applied.

Also, these dividends are subject to 15, 5% of social contributions.

By creating a holding for the buyout, the dividends shared out aren’t subject to social contributions.

The dividends can be almost totally exempted from taxation (equivalent to 95%).

This tax benefit will not be applied if the holding keeps for two years the dividends and a parent subsidiary tax system is chosen.

Be aware that this option can be exercised in the cases where the holding (parent company or “société mère”) holds at least 5% of the share capital of the acquired company and those two companies are subject to corporation tax.

2. Another tax optimization

At the moment of the holding incorporation, it’s important to provide for the option concerning the tax consolidation for the target company and the holding.

Indeed, about this tax consolidation, the taxation is made at the standard of algebraic sum of the tax results of the integrated group of companies.

The incorporation of a holding made in order to buyout the target company generates usually a deficit because of the annual carrying charges which will reduce the target company’s tax result.

A corporate tax economy is reached but consequently it will increase the existing financial resources of the incorporated group.

3. Advices

The success of this transaction depends of the acquired company’s power to share out adequately the dividends in order to guarantee the refund of the loan taken out by the holding.

Incorporated a takeover holding will fund the acquisition by the company that you want to buyout. By combining this transaction, the parent subsidiary tax system and the tax consolidation, you will be exempt 95% of the dividends collected by the holding. You will reduce the tax corporation of the acquired company.

Nicolas BRAHIN, Avocat

Master’s Degree in Banking and Financial Law

Université Panthéon-Sorbonne

Email : nicolas.brahin@brahin-avocats.com

fichier à telecharger:
160607 LBO Structure

It results from the combination of articles L1231-1¹ and L1237-11² of the French Employment Code (“Code du Travail français”) that the contractual termination of the employment agreement can only intervene as required by the legal rules which regulate this way of termination.

Those rules are intended to guarantee the freedom of consent of the parties.

This is what the French Highest Court or “Cour de Cassation” sums up in its ruling of 15th October 2014³.

Does this ruling mark the end of the amicable termination of the agreement?

From a legal point of view, do the parties still have recourse to terminate the relationship by mutual agreement based on article 1134 al.2⁴ of the French Civil Code (“Code civil français”) and the previous jurisprudence?

This issue is not new and both legal doctrine and magistrate are concerned about it.

Since the entry into force of the contractual termination’s measure⁵, the doctrine soon understood that both employer and employee can no longer have recourse to the amicable termination.

The French jurisdictions and the French High Court keep up with the pace⁶.

The contractual termination “ordinary law” of the negotiated termination of the employment agreement

The Cour de Cassation made it clear in a legal ground principle which will be explained in the following words.

An employment agreement can be terminate by mutual agreement or on the initiative of the employer or employee.

If the contract is terminated by mutual agreement, an agreement between the parties concerning this kind of termination will be required.

Thus, the contractual termination’s validity can be checked.

That means that the consent of the two parties can be considered.

This is the result of the combination of articles L1231-1⁷ and L1237-11⁸ of the French Employment Code (“Code du Travail français”).

If the contractual termination is accepted as a negotiated way to terminate the agreement, the provisions of article L1231-4⁹ of French Employment Code (“should not be ignored.

This article provides that the parties cannot foresee to renounce in advance to invoke the rules about termination of permanent employment agreement contained in the French Employment Code.

Those rules are made for both employee and employer in order to protect them.

Those arguments mean that any termination, amicable or negotiated, which doesn’t come within the scope of specific provisions of contractual termination and legal exceptions, constitutes de facto a redundancy without actual and serious basis.

Nicolas BRAHIN, Avocat

Master’s Degree in Banking and Financial Law

Université Panthéon-Sorbonne

Email : nicolas.brahin@brahin-avocats.com

fichier à telecharger:
160607 The contractual termination of the employment agreement

A fiscal mechanism foresees an exemption for the VAT to which the transfer of an immovable affected by a rental activity is subjected to.

I.CASES WHERE THE EXEMPTION IS POSSIBLE:

Article 257 bis of the French tax code (“Code general des impôts”) provides a specific mechanism of VAT exemption for an operation undertaken between taxable persons (“redevables de la taxe”) leading to a transmission of the total or partial sum of assets (“universalité totale ou partielle de biens”) (in return for payment or freely, or by assets to a company).

In certain cases, either the transfer benefits from an exemption of taxation, or the transferor (“cédant”) is exempted to proceed to the regularization of the VAT previously deducted.

If the conditions of application of the exemption are fulfilled, the tax authority fully applies this mechanism.

The tax authority has allowed this mechanism to apply under conditions to the sale (isolated) of an immovable affected by a rental activity subjected to VAT.

This implies that the property is sold to a purchaser that intends to pursue the transferor’s rental activity (with leases subjected to VAT, ipso jure or by option).

This mechanism does not apply in the event of an isolated sale of an immovable if it is (only) partially affected to a rental activity.

II. THE APPLICATION OF THE EXEMPTION TO A VACANCY:

An immovable temporarily vacant during the transfer can benefit from this mechanism.

A vacancy can indeed be justified by the market situation of the immovable, a change of tenancy, by works or after any damage without the intention of renting the immovable subjected to VAT being questioned.

Consequently, the duration of the vacancy is not taken into account for “article 257 bis”, it is only the demonstration of an intention to rent during the vacancy that needs to be proved.

The circumstances that have motivated the departure of the (last) tenant of the immovable are not alone capable of questioning the application of the mechanism.

III. THE CONDITIONS FOR THIS EXEMPTION IN THE EVENT OF A VACANCY:

It must be kept in mind that the mechanism of “article 257 bis” will only be applicable if the transferor can prove he is actively searching for a tenant.

In practice, the proof can easily be given if the transferor has handed a research mandate for a tenant (or a management mandate).

However, the rent must be adjusted to the market.

In the event of a resale of immovable activity, if a person liable to VAT proceeds to the isolated sale of an immovable in inventory (current assets), the tax authority considers that the exemption is not applicable even if while waiting for the resale, the immovable is affected by a lease subjected to VAT.

fichier à telecharger:
160506 VAT for the transfer of a rented immovable (TVA cession immeuble)