Legal news

An illustration of the different tax effects based on the same legal basis of the elimination of the double taxation : different tax effects according to the taxable person residence

Tax treaties are international treaties designed to prevent taxpayers – companies or individuals – from being taxed twice on the same income by two different countries, and also to combat tax evasion and avoidance.

A country’s tax system may include rules imposing higher taxation on foreigners. Many tax treaties between FRANCE and other countries include a non-discrimination clause based on nationality. Thanks to this clause, foreign taxpayers will be treated in the same way as nationals of their country of residence, who are in a comparable tax situation.

An exemplary illustration will be given of the principle of eliminating double taxation and its different effects between different countries. The legal basis of elimination of the double taxation is the same but the tax effects are different according to the country of the residence of the taxable person.

Two methods exist for eliminating double taxation. These are the exemption method, which can be total or progressive, and the imputation method, which can also be total or ordinary.

FRANCE has the most extensive network in the world, with 121 bilateral tax treaties. The majority of international tax treaties signed by FRANCE are based on the Organization for Economic Cooperation and Development (“Organisation de coopération et de développement économiques”) (OECD) model, which provides different definitions of the concepts of stable establishment or residence and sets out tax rules for the taxation of income and wealth.

Tax treaties are negotiated by the Tax Legislation Directorate (“Direction de la législation fiscale »)(DLF), in conjunction with the Ministry of Europe and Foreign Affairs, which plays a secondary role. The International Legal and Economic Expertise Mission (“Mission d’Expertise Juridique et Économique Internationale”) (MEJEI), located within the Public Finance Department (“Direction Générale des Finances Publiques”) (DGFiP), is responsible for ensuring that tax treaties are properly applied. However, each tax treaty between FRANCE and another country imposes different requirements.

Below, it will be analyzed the tax treaties between FRANCE and three other countries: UNITED STATES, HONG-KONG and RUSSIA.

1. Tax treaty between FRANCE and the UNITED STATES concerning taxes on income and wealth.

An agreement for the avoidance of double taxation and the prevention of fiscal evasion and fraud with respect to taxes on income and capital was signed on August 31, 1994, in PARIS between the Government of the French Republic and the Government of the UNITED STATES of America. It is accompanied by a protocol and an exchange of letters forming an integral part of the agreement.
This agreement replaced the agreement signed on July 28, 1967, amended by the protocols of October 12, 1970, November 24, 1978, January 17, 1984, and June 16, 1988, including the exchanges of notes or letters annexed.

The article 33 of the agreement provides that the provisions of the agreement shall apply:

“a) with respect to withholding taxes on dividends, interest and royalties, and U.S. excise taxes on insurance premiums paid to foreign insurers, to amounts paid on or after February 1, 1996.
b) with respect to income taxes, to tax periods beginning on or after January 1, 1996.
c) as regards taxes not mentioned above, to taxable events occurring on or after January 1, 1996.
d) Notwithstanding the foregoing:
– the provisions of e of paragraph 4 of article 10 (dividends) and those of article 12 (royalties) shall apply to dividends and royalties paid on or after January 1, 1991.
– for mutual agreement procedures under Article 26 of the Convention, to cases submitted to the competent authorities on or after December 30, 1995”.

Persons covered by the agreement

Unless the convention provides otherwise, the persons concerned are residents of FRANCE and the UNITED STATES, namely any person subject to tax by reason of their domicile, their residence, their registered office. management, its head office or any other criterion of a similar nature. Green card holders are also affected.

Determination of tax residence

• Natural persons :

In the event of a residence conflict, it is resolved by successively applying the criteria retained by the convention, namely: The permanent home, the center of vital interests, the usual place of stay, the nationality, the agreement of the competent authorities of the two countries.

• Legal entities :

The conflict of residence is decided by the competent authorities who take into account the place of effective management of this person, their registered office and any other relevant element. In the absence of such agreement, such person shall not be considered a resident of either Contracting State for the purposes of granting the benefits of the Convention.

Taxation of individuals

• Activity income :

Remuneration from salaried employment is, conventionally, taxable in the State in which the professional activity is carried out (except in the case of temporary assignments). Pensions are taxable in the state of source.

• Passive income :

Real estate income is taxable in the state where the building is located. Dividends are taxable in the state of residence of the beneficiary but may be subject to withholding in the state of source which cannot exceed 15% of the gross amount of these dividends. Interest is taxable in the beneficiary’s state of residence. Real estate capital gains are taxable in the state where the building is located. Capital gains from the sale of shares or units are taxable in the state of residence of the beneficiary. Particularity concerning American nationals who are tax residents of FRANCE, as an exception, the dividends, interest and capital gains on the sale of securities from American sources that they receive are taxable in the UNITED STATES.

Wealth tax

The article 23 of the convention deals with wealth tax, but also applies to real estate wealth tax (“impôt sur la fortune immobilière” (IFI), as confirmed by the French tax administration.
This provision provides for the taxation of wealth constituted by real estate in the State in which the property is located.
It also provides that natural persons of American nationality who do not have French nationality and who become residents of FRANCE are exempt from wealth tax for the 5 years following those of their installation in FRANCE, for assets only. held outside FRANCE.

Business taxation

The convention uses the criterion of permanent establishment allowing profits from a commercial or industrial activity to be taxed at the place of exercise of these activities and not at the place of residence of the company. Thus, in the case of a company established in FRANCE which carries out all or part of its activity in the United States where it has a permanent establishment, the results resulting from this activity and attributable to the permanent establishment will be taxable to the UNITED-STATES.
A permanent establishment is defined as an installation with a certain permanence. This may include a management headquarters, a Branch or an office.

Elimination of double taxation

As a reminder, the tax convention distributes the right to tax income between FRANCE and the UNITED STATES. However, as a tax resident of a country, this person must declare all of their income there. Likewise, American nationals, even if they are residents of another country, must declare all of their income in the United States. The France-United States convention uses the tax credit (“crédit d’impôt”) as a method of eliminating possible double taxation.

System to combat tax evasion and fraud

Finally, the agreement has an administrative assistance clause with a view to combating tax fraud and evasion, as well as a mutual assistance clause in matters of recovery allowing for an automatic suspension of payment and not having to provide guarantees for those liable for the exit tax when they leave FRANCE.

Tax allocation under the tax treaty

Where it gets a little more complicated is that the treaty gives the right to tax differently depending on the nature of the income. Sometimes, only the taxpayer’s state of residence will be able to tax, sometimes the state of income, sometimes the right will be attributed to both, and this is where the tax credit mechanism comes into play.

To simplify matters, here are a few rules to bear in mind (note that there are often exceptions):

• Salaries, wages, annuities received from salaried employment: taxable in the state where the activity is generated ;
• Self-employed activities: taxable in the state of residence ;
• In the case of wealth tax, if you are an American tax resident, you are not taxable in the United States and you will only be taxable in France if your French wealth is equal to or greater than 1.3 million euros (excluding financial investments) ;
• Dividends: a priori taxable in both states, but with a ceiling in the source state.

Furnished rental regime

Income from a furnished rental activity falls under the category of industrial and commercial profits (“bénéfices industriels et commerciaux”) (BIC). The tax regime applicable to this income when it is taxable must be determined under common law conditions (micro-BIC, self-employed, simplified regime or normal real regime). Professional furnished rental companies must keep commercial accounts and comply with all reporting and accounting obligations imposed on businesses.

To sum up, persons not domiciled in FRANCE must in principle pay a tax which cannot be less than 20% of taxable income. However, if a taxpayer manages to justify that the average rate of French tax on all of this income from French and foreign sources is lower than the minimum rate of 20% then he will be taxed at this average rate on his income alone.

2. Tax convention between FRANCE and HONG-KONG

FRANCE and the HONG-KONG Special Administrative Region of the People’s Republic of China signed an agreement in Paris on October 21, 2010, for the avoidance of double taxation regarding to taxes on income and the prevention of fiscal evasion and avoidance.

Persons covered by the agreement

This agreement applies to people who are residents of FRANCE and HONG-KONG under the internal law of each country.
However, the protocol specifies that a tax resident of one of the countries cannot benefit from the provisions of the convention, since he carries out his professional activities in a free zone.
On the other hand, a resident benefiting from a specific tax regime allowing him to be taxed only on income originating in this country benefits from the convention.

Determination of tax residence

• Natural persons :

Natural persons benefit from this agreement. However, in the event of a residence conflict, it can be resolved by successively applying the criteria retained by the convention, namely, the permanent home, the center of vital interests, the usual place of stay, the nationality for FRANCE or the right of residence for HONG-KONG and the agreement of the competent authorities of the two countries.

• Legal entities :

They are considered tax residents of the country in which their effective place of management is located.

Taxation of individuals

• Activity income :

Remuneration from salaried employment is, conventionally, taxable in the State in which the professional activity is carried out.

• Passive income : 

Real estate income is taxable in the state where the building is located. Dividends are taxable in the state of residence of the beneficiary. However, they may be subject to withholding in the State of source, which cannot exceed 10% of the gross amount of these dividends. Interest is also taxable in the state of residence of the beneficiary. However, the State of source may also make a deduction, which may not exceed 10% of the gross amount of interest.
Real estate capital gains are taxable in the state where the building is located. Capital gains from the transfer of shares or shares are taxable only in the state of residence of the beneficiary except in the case of substantial participation, where the capital gain is then taxable in the state of residence of the company.

Wealth tax

The agreement signed with HONG- KONG includes a provision relating to the wealth tax, a tax in force at the time of its drafting and must also apply to the real estate wealth tax (“impôt sur la fortune immobilière”) (IFI). This provision distributes the right to tax wealth between the two countries. It provides in particular for the taxation of wealth constituted by real estate in the State of location of the property.

Business taxation

The convention uses the criterion of permanent establishment allowing profits from a commercial or industrial activity to be taxed at the place of exercise of these activities, and not at the place of residence of the company. Thus, in the case of a company established in FRANCE which carries out all or part of its activity in HONG-KONG where it has a permanent establishment, the results from this activity and attributable to the permanent establishment will be taxable in HONG- KONG. A permanent establishment is defined as an installation with a certain permanence. This may include a management headquarters, a branch, or an office.

Elimination of double taxation

In FRANCE, the method for eliminating double taxation is tax credits (“crédit d’impôt”)
The tax credit is an amount deducted from your income tax. If the tax credit exceeds the amount of your income tax, the surplus is reimbursed by the Public Finance Department (“Direction Générale des Finances Publiques”).

System to combat tax evasion and fraud

The convention includes a provision relating to the exchange of information. This provision authorizes the communication of information, including banking information. However, only detailed requests can be made by the tax authorities, in order to avoid spontaneous or automatic “fishing for information”.

3. Tax treaty between FRANCE and RUSSIA

An agreement for the avoidance of double taxation with respect to taxes on income and capital was signed on November 26, 1996, in PARIS between the government of the French Republic and the government of the Russian Federation. It is accompanied by a protocol forming an integral part of the agreement.

Specifically, the article 28 of the agreement provides that the stipulations it contains apply:

“a) with regard to taxes collected by withholding tax;

(b) in relation to other income taxes, to income relating to any tax period

c) with regard to other taxes, to taxes for which the taxable event will occur from January 1, 2000”.

The delegations of France and Russia met on January 22, 2001, with a view to resolving the difficulties in applying the tax convention of November 26, 1996.

This delegation dealt with the definition of construction sites as permanent establishments, the application of a withholding tax on dividends under the tax system, and the deductibility of certain expenses. The negotiations took place in an atmosphere of friendship and mutual understanding.

Persons covered by the agreement

The Convention applies to persons who are residents of one or both States.

Taxes covered

As far as FRANCE is concerned, these are income tax, corporate tax, payroll tax and wealth solidarity tax (“l’impôt de solidarité sur la fortune”) (ISF). As far as RUSSIA is concerned, these are the tax on profits of enterprises and organizations (including tax on salaries exceeding the established norm), tax on personal income, tax on business property and personal property tax. Russia has not introduced a wealth tax.

Real estate wealth tax

The real estate wealth tax (“impôt sur la fortune immobilière”) (IFI) is restricted to buildings and real estate rights held by the taxpayer, directly or through a company or an organization.

In the administrative comments relating to this new tax, on June 8, 2018, the French tax administration specified in a remark that the principles guiding the interpretation of the provisions of the tax conventions used in matters of ISF are taken up in terms of IFIs. The fact remains that a convention applicable to the ISF is not, however, applicable to the IFI, a case-by-case examination of the conventional stipulations being necessary.

Deductibility of expenses

Differences of interpretation persist between the French and Russian parties on the application of the rules for deducting various types of expenses when calculating the industrial and commercial profit made by a permanent establishment located in RUSSIA of a company incorporated under French law, or by a subsidiary located in RUSSIA of a French company.

The French side considers that, in application of the provisions of the Franco-Russian agreement of November 26, 1996, operating expenses incurred by a permanent establishment or subsidiary meeting the conditions are fully deductible in determining its income, provided that this deduction does not exceed the amount that would have been agreed in the absence of special relations between the debtor and the effective beneficiary of this income.

The Russian party points out, however, that the ceiling for deducting expenses relating to representation, advertising and training has been substantially raised since April 1, 2000.
In this respect, it points out that since the ceiling was raised, it has not been informed of any new cases of litigation brought by companies.

In any case, the Russian party is willing to examine, on a case-by-case basis, within the framework of the amicable procedure provided for in article 25 of the agreement, any difficulties arising from the application of these limitations.

The Russian party, for its part, considers that while domestic legislation permits the deduction of special expenses from taxable profits within certain limits. At the same time, it has been confirmed that regardless of the provisions of domestic legislation, interest is deducted from taxable profits, irrespective of the status of the lender and the terms and conditions of the credit giving rise to the interest payment. The only limitation on interest deductibility is the maximum interest rate. However, there is a huge update in this particular convention as RUSSIA suspends key provisions of double taxation agreement with FRANCE and other “unfriendly” states.

On August 8, 2023, the Russian President issued a decree, which unilaterally suspends – on the part of the Russian counterpart – most of the substantive provisions of the double taxation avoidance agreements concluded between RUSSIA and the so-called unfriendly states which have imposed sanctions on RUSSIA.

The appeal concerns 38 double taxation avoidance agreements, including the one concluded with FRANCE on November 26, 1996. The suspension is effective from August 8, 2023, until the unfriendly states remedy their violations of RUSSIA’S legitimate economic and other interests, the rights of its nationals and legal entities, or until the termination of these international treaties with respect to Russia. The suspension was legally adopted under the Russian Federal Law on International Treaties, which authorizes the President, in situations requiring urgent measures, to suspend the effect of an international treaty that has been ratified by federal law.

Although the decree mentions the need to take urgent measures due to the unfriendly actions of a number of states (sanctions), as required by Russian federal law, this may be insufficient to serve as grounds for unilateral suspension from the point of view of international law. This latter point may be one of the factors to be taken into account by so-called unfriendly states when devising their retaliatory measures.

As the festive season approaches, companies may wish to give gifts to their most important customers. These gifts are subject to specific tax rules.

The end of the year can be an opportunity to give a gift to your major customers to thank them for the trust they place in you and to consolidate the professional relationship you have with them. But be careful to stay within the bounds of tax regulations to avoid any risk of tax reassessment.

Recovery of VAT

VAT on gifts is deductible if they are of very low value, i.e. when the unit value of the gift does not exceed 73 EUR (including VAT) per year and per recipient in 2023. The tax authorities include in this value the distribution costs borne by the company.

Deductibility from profits

Gifts to customers are deductible from taxable profits, provided that they are given in the direct interests of your company and that their value is not excessive.

Important: you must be able to prove the usefulness of business gifts for your business (building customer loyalty, for example) and, in particular, be able to identify the recipients by name. It is therefore advisable to keep all the necessary supporting documents (invoices, names of customers, etc.).

Obligation to declare

If the total amount of business gifts exceeds 3.000 EUR over the financial year, you must, in principle, declare them, on pain of a fine. In practice, sole traders fill in a special box in appendix no. 2031 bis to their income tax return. Companies, on the other hand, must attach a detailed statement of overheads (no. 2067) to their income tax return.

The French Pinel law is one of several laws designed to encourage rental investment and support real estate construction. In the French political landscape, it’s common practice to offer tax breaks to boost the construction of new homes in FRANCE.

The Pinel scheme was presented on August 31, 2014. The law officially came into force on January 1, 2015. It is dedicated to new rental investment but has an environmental and social component. The law is aimed at all French people wanting to invest in a new home, even without a down payment.

The Pinel system was initially designed for the period 2014 to 2017. The Pinel law was renewed for the first time until December 31, 2021, keeping the same conditions and advantages, then a second time with the finance law for 2021, until December 31, 2024. For the next two years, the tax reduction rates have been modified. 

• Advantages of the Pinel law

1. Long-term rental

The minimum rental imposed by the Pinel law is 6 years. It is also possible to rent for 9 years, and then extend for 3 years, for a total rental period of 12 years. The longer the commitment, the higher the tax exemption rate. Therefore, it can be advantageous to rent your property for as long as possible.

The main advantage of long-term rental is therefore its tax exemption rate, as well as the possibility of generating rental income over the longer term.

1. The tax reduction 

The Pinel system allows the buyer to minimize their income tax if they buy a new home between January 1, 2014, and December 31, 2024. 

The reduction of the tax applies if the property is rented for at least 6 years and falls within the annual investment limit of two properties and 300.000 EUR. The amount of tax savings is determined by the duration of the rental (six, nine or twelve years). If a taxpayer buys housing under the Pinel system in 2022, they will be able to benefit from a tax saving of up to 6.000 EUR per year.

The Pinel law provides for a tax reduction of 12% for a 6-year commitment, 18% for a 9-year commitment and 21% for a 12-year commitment retrospectively. 

The initial commitment is 6 or 9 years, renewable for 3 years in both cases. As part of an initial 6-year commitment, a second extension period of 3 years is possible.

1. The changes in 2023 and 2024

The Pinel law was extended until December 31, 2024, by the finance law for 2021. This extension is, however, accompanied by changes to the criteria and tax reduction rates. The tax reduction rate for a Pinel investment made between January 1 and December 31, 2023, is reduced to 10.5% for a 6-year commitment, 15% for 9 years and 17.5% for 12 years.

Rates on investments made during the calendar year 2024 have also been reduced. The tax reduction rate is reduced to 9% for a 6-year commitment, 12% for a 9-year commitment, and 14% for a 12-year commitment.

1. The eligibility of the Pinel law

The choice of the geographical location of the property is essential in this case. 

Before investing in the Pinel law, it is essential to select the appropriate real estate, in particular its geographical location: it must be located in regions eligible for the Pinel system. 

If the Pinel project was implemented on French territory, it is above all to respond to the scarcity of housing in the most contentious sections of France. It appeared vital, in this context and for all real estate incentives, to identify the geographical locations where the Pinel law would be extremely beneficial. 

It is also important to take into account other elements when you are going to choose your property, which are as follows:

• The population growth of the city in which you wish to invest ;
• The quality of life in the region;
• The economic potential of the region;
• Access to the public transport network ;
• The region in which your future home will be located.

1. Compliance with the formalities of the Pinel law

The objective of the Pinel system is to allow low-income families to find housing more easily in places where the average rent is expensive. Therefore, to be able to exempt from tax, the investor must respect the rent ceilings. The Pinel rent ceilings are linked to the Pinel zone in which the property is located as well as to the habitable surface area of the property. 

The owner must also rent to people whose income does not exceed a certain threshold. These ceilings allow people with low incomes to have priority access. The ceilings are set according to the number of shares in the tenant’s tax household as well as the zone in which the property is located.

This measure makes it possible to fight against exorbitant rents which would exclude part of the population. Rent ceilings make it possible to limit abuses in certain geographical areas where there are very many tenants and where the demand for housing is very high. Rent caps are intended to make affordable housing accessible to everyone. Thus, French people with low incomes can afford to live in a new apartment.

• Disadvantages of the Pinel law

1.The risks of the Pinel law

Before embarking on a Pinel real estate investment project, an owner must be well informed of all the eligibility conditions imposed by the provision.

These conditions must be met by the owner, the accommodation, and the tenant for the rental investment project to be validated by the tax authorities, that is to say the taxes.

If one of the conditions is not met, the owner will not be able to benefit from the tax reduction from the Pinel system. If one of the conditions is not respected during the commitment period, he may be required to reimburse the advantage already received.

2.The definition of the profitability 

Before making any real estate investment, it is essential to determine the profitability of the project. If you want to buy a house with the intention of renting it out and then using it as your own home, this concept will have minimal influence on your choices. If, on the other hand, the investment only aims to purchase a new rental property, profitability must be taken into account from the start of your project to guide you. To determine whether your Pinel investment will make you money over time, start by determining the gross return on your investment, then subtract the fees. You will thus obtain the net profitability of your investment under the Pinel law.

3. The age of the building 

New real estate is more expensive than old real estate. New housing is undoubtedly more expensive. There is, however, a very solid explanation for this. First of all, there is VAT. When you buy a new home, VAT is generally 20%. There is no VAT to pay on an old house. Then, a new home is often sold with a parking space or garage. A small bonus included in the overall sale price. Finally, new environmental standards increase construction costs (by around 10%). This explains why new housing prices are higher.

Investors are exploited by sellers. We often hear that developers take advantage of buyers. This is another common misunderstanding. A decree came into force on January 1, 2020, to prevent abuse. It limits developer fees to 10% of the cost of housing.

Non-professional furnished rental

The Non-professional furnished rental (“Location Meublée Non Professionnelle”) status is a simple and attractive investment solution for rental property, enabling landlords to rent out furnished accommodation and benefit from tax advantages.

• Preliminary formalities: 

1. Registration with the Registry of the Commercial Court (“Greffe du tribunal de commerce”): 

As a non-professional furnished rental company, you must register with a business formalities center.

This allows:

1. to obtain a Siret number,
2. to make known the existence of this activity,
3. indicate the tax regime chosen.

On the other hand, the status of non-professional furnished rental company does not require the creation of a company. Non-professional furnished rental can only complement a salaried activity.

1. Prior authorization for change of use: 

In certain municipalities, the lessor (professional or not) must submit a request for prior authorization for change of use to be able to rent it for short periods repeatedly to passing customers. 

This authorization does not apply when the rented accommodation remains the principal residence of the lessor.

       2. Check-in in a furnished tourist accommodation or guest room

Any person (professional or not) who offers furnished tourist accommodation for rental must have previously made a declaration to the mayor of the municipality where it is located.

This prior declaration is not obligatory when the residential premises constitute the principal residence of the lessor except in municipalities where the change of use of premises intended for residential use is subject to prior authorization and if the municipal council in decided otherwise.

The rule is the same if you rent rooms at your home, breakfast included, (bed and breakfast) for one or more nights to tourists.

• The different categories of furnished rental

Furnished rentals can be used as principal residences, occasional rentals, or seasonal and tourist rentals. In these cases, the Furnished leases as the tenant’s principal residence. 

1. Furnished leases for principal residences are governed by articles 25-3 till 25-11 of the French Civil code (Code civil):

Indeed, the article 25-3 of the French Civil Code specifies that: 

“The provisions of this title are a matter of public policy and apply to rental contracts for furnished accommodation as defined in article 25-4, where such accommodation constitutes the tenant’s principal residence within the meaning of article 2.

Articles 1, 3, 3-2, 3-3, 4, with the exception of l, 5, 6, 7, 7-1, 8, 8-1, 18, 20-1, 21, 22, 22-1, 22-2, 24 and 24-1 apply to furnished accommodation.

The present title does not apply to “logements-foyers” or to housing covered by an agreement with the State concerning occupancy conditions and allocation procedures.

The present title does not apply to housing allocated or rented because of the exercise of a function or the occupation of a job, nor to rentals granted to seasonal workers”.

The lease must be concluded for a minimum renewable term of one year. This period is reduced to 9 months for students, with no automatic renewal. 

1. Furnished mobility leases are governed by articles 25-12 till 25-18 of the French Civil code (Code civil):

Indeed, the article 25-18 of the French Civil Code specifies that: 

“Rental charges ancillary to the main rent are recovered by the lessor in the form of a lump sum paid at the same time as the rent, the amount and payment frequency of which are defined in the contract, and which may not give rise to any subsequent supplement or adjustment. The amount of the flat-rate service charge is set according to the amounts payable by the lessor in application of article 23. This amount must not be manifestly disproportionate in relation to the last statement of charges by type, in relation to the frequency of payment of the flat-rate charge”.

This is a short-term lease of furnished accommodation to a tenant who can prove, on the date the lease takes effect, that he or she is on vocational training, higher education, an apprenticeship contract, an internship, a voluntary commitment as part of a civic service, a professional transfer or a temporary assignment as part of his or her professional activity. 

 The mobility lease is concluded for a minimum of one month and a maximum of ten months and is non-renewable and non-renewable on-professional rental.

• Tax planning

For tax purposes to qualify for non-professional furnished rental status, and not be considered a professional lessor, your rental income must:

1. be less than 23.000 EUR per year (for all members of the tax household), or not exceed the total income of the tax household subject to income tax in the following categories: salaries and wages, industrial and commercial profits, agricultural profits, non-commercial profits.

For many years, furnished rental of residential property has been a favored tax-efficient option.

Over time, however, legislators have increasingly tightened the conditions of application, both in terms of tax law and legal regulations.

       2. annual revenues in excess of 23.000 EUR, revenues exceeding the total professional income of the tax household.

Regarding the Tax benefits, the concerned has the choice between two tax regimes, the micro-BIC regime, also called flat-rate regime and the real regime. The goal is to choose the best tax regime for your situation, we therefore advise you to carry out simulations.

• Advantages

This particular rental status is becoming increasingly popular with property owners, as it offers a number of advantages. Indeed, this type of rental offers advantages for both the owner and the tenant. The best-known benefit is the tax advantage. 

1. A rental facility

Furnished accommodation is, most often, rented more quickly. Indeed, this type of rental can allow owners to avoid rental vacancies. This is due to the fact that people looking for furnished rentals are, most of the time, students or people changing professionally or personally. 

They will therefore tend to stay in the accommodation for a rather short time. They therefore necessarily have an easier time choosing an apartment. Unlike people who are looking for empty rentals whose aim is to settle in for the long term. They therefore think more about getting an apartment.

2. Flexibility of status

Moreover, this type of rental is a status which has more flexible rental criteria. Indeed, there are differences between empty accommodation and furnished accommodation in terms of the rental contract. If you want to know more about the rental contract for a furnished apartment, click here. The differences are for example the duration of this contract, the duration of the notice period for the tenant and the owner or the amount of security deposit authorized.

 All these elements which differ between the two types of accommodation make furnished rental more flexible and therefore more attractive for tenants and owners alike. For example, if we are interested in the length of notice. It is shorter for furnished accommodation for both the owner and the tenant. This allows the tenant to quickly change apartments and it allows the owner to end the contract if things do not go well with the existing tenant.

3. Advantageous rents

This type of rental status allows you to rent your apartment at a higher rent. Obviously, an apartment that has furniture can be rented with a higher rent than an empty apartment. Quite simply because you have invested more, but also because the tenants are ready to pay more for a furnished apartment because they will not have the additional costs of furnishing the accommodation and they will not have to make the move at their arrival and departure. 

A furnished apartment rents at a rent 12% higher on average than if it were empty. Of course, thanks to this advantage, you will obtain higher income, but you must not forget that the furniture will wear out and that tenants can also damage it. You will therefore receive higher income, but additional expenses are to be expected.

4. Resale

It is also very interesting to have this type of rental status for the resale of your property. You can, of course, invest in real estate in order to carry out classic furnished rentals and decide to change its function a few years later. You can choose to use your accommodation as a primary or secondary base. When you are an expatriate, this can be interesting if you want to come back from time to time to see your family or if you want to return to France in part of your future life. But you can also choose to resell your property. 

A furnished property can sell for a higher price than an empty property. In fact, you can choose to sell your furnished property. You can therefore increase your price. In addition, if you have carried out renovation work in addition to the furnishing, your property may sell for more. This advantage is really one in heritage cities. In heritage towns, the important thing in a real estate investment is resale, unlike in yield towns. In general, when an owner invests in heritage towns, he aims to resell his property at the maximum price.

Disadvantages

1. Tax risk

This status is very popular for its many advantages but in particular for its tax advantage. We have explained it to you in more detail just above, but when you are this type of rental your income must be declared in the Industrial and Commercial Profits (“BIC”) (bank identification code) category.

You can then choose between the micro-BIC category and the real category. However, we must still be vigilant regarding the risks that owners may face regarding the tax side. Tax changes and regulatory changes may occur from time to time. These changes can be negative for owners in certain situations. We therefore advise you to be vigilant regarding all changes.

2. Limited depreciation

Depreciation is a significant advantage of this type of rental. However, this is an advantage limited in time. In fact, you can amortize your entire investment over approximately 30 years and the purchase of your furniture over approximately 7 years. But when the depreciation period for your investment is over, you cannot start depreciating again. 

The possibility of depreciation is therefore a fleeting advantage. When this benefit ends, your taxable share of your income will therefore necessarily be higher. We therefore advise you to do the calculations carefully to find out if the actual regime is the tax regime that suits you and to find out if this type of rental status corresponds to you.

3. To face of the concurrence

This type of rental status is a very popular status. Indeed, we spoke to you about it a little above, but it is a status which interests more and more owners. This is because it brings many benefits. We talked to you about these advantages in the first part of this article. They are numerous and very interesting for owners. However, due to its success, the number of furnished apartments is constantly increasing in many cities in FRANCE.

 You must therefore find out carefully about the location of your property. In some cities, it may be better to rent your property empty. Indeed, if there are too many furnished accommodations in a city and therefore too much competition, you may have difficulty finding tenants. You could therefore face long rental vacancies and therefore a significant loss of profitability.

The French Supreme Court (“Court de Cassation”) affirms that there are two types of loss of opportunity. There is the infirm loss of opportunity, which is reparable, and the hypothetical loss of opportunity, which is not reparable.

The notion of loss of opportunity is rather complex, as it is ambiguous. It can refer to both the disappearance of the probability of obtaining an advantage and the disappearance of the possibility of avoiding a loss.

Strictly speaking, loss of opportunity can be understood as the disappearance of the probability of obtaining an advantage, but the risk that could designate both the disappearance of the probability of obtaining an advantage and the disappearance of the possibility of avoiding a loss.

Compensation for the loss of an opportunity requires certain conditions that are not as clear-cut in the case of compensation for risk, which may correspond more to a future loss whose occurrence is to be prevented.

Compensation for loss of opportunity is divided into two separate matters:

I. Admission of loss of opportunity
II. Assessment of loss of opportunity

Admission of loss of opportunity

Loss of opportunity is sometimes situated between certain and hypothetical damage.
The risk is in proving that the loss of opportunity has certain, serious, and harmful consequences.
The article 1240 of the French Civil Code (“Code civil”) states that:
“Any act whatsoever of man, which causes damage to another, obliges the person by whose fault it occurred to repair it”.

Judges are frequently called upon to order full compensation for the damage suffered.

On the other hand, purely hypothetical loss of opportunity is not compensable.

Only the loss of a serious chance can be compensated. This filtering is underlined by a decision of the Supreme court (“Court de Cassation”), dated February 8, 2023 (Appeal n° 22-10.169):

“In the event of fault attributed to the healthcare professional in keeping the medical record, the burden of proof is reversed, and it is up to the healthcare professional to demonstrate that his or her fault was not the cause of the bodily injury suffered by the victim”.

The loss of opportunity must therefore have a definite causal relationship with the event giving rise to liability.

At the same time, another recent decision by the Supreme Court (“Cour de cassation”), dated September 15, 2022 (Appeal no. 21-13.670) states that:

“The prejudice resulting from this failure can be analyzed as the loss of an opportunity to take out an insurance policy suited to his personal situation, and any loss of opportunity gives rise to a right to compensation, without the borrower having to show that, better informed and advised by the bank, he would have taken out insurance that would have guaranteed the risk involved, or to prove a reasonable loss of opportunity”.

This solution is not new, as the Supreme Court (“Cour de Cassation”) often affirms that any loss of opportunity, however slight, can give rise to culpable liability.

However, the Supreme court (“Court de Cassation”) reasoning have a performative virtue, since they imply that any breach of the duty to inform or fraud automatically creates a loss, which must be compensated.

However, the burden of proof is particularly difficult for the victim to prove satisfactorily.

The plaintiff is expected to provide sufficiently convincing evidence to establish that, had he been better informed, he would have acted differently.

Between future loss, which is compensable, and possible loss, which is not, the French highest court (“Cour de cassation”) confirms the admission and compensation of a loss of opportunity.

The element of prejudice constituted by the loss of opportunity may in itself be direct and certain, whenever the disappearance of the probability of a favorable event is established as a result of the tort, even though, by definition, the realization of an opportunity is never certain.

The loss of an opportunity is therefore distinct from a mere risk, which lies in the existence of a probability of suffering a loss.

In this case, the lost opportunity is characterized by the disappearance of the probability of obtaining an advantage, or by the disappearance of the possibility of avoiding a loss.

In such cases, the Supreme Court (“Court de Cassation”) may still admit the loss of opportunity.

Assessment of loss of opportunity
(« L’évaluation de la perte de chance »)

Assessing loss of opportunity is a difficult exercise.

Today, loss of opportunity is governed by praetorian law. This will change little if the proposed reform of civil liability is adopted.

Measuring loss in the event of a professional’s failure to meet his or her obligation to warn or inform raises formidable difficulties.
As a result, trial judges, who are sovereign in their assessment of damages for loss of opportunity, cannot rely on certainties or probabilities that are too high, or “take for granted” several hypotheses, at the risk of being censured by the Supreme court (“Cour de cassation”).

The Supreme court (“Cour de cassation”) exercises only superficial control over the assessment of loss of opportunity.

The sovereign discretion of trial judges makes the criteria used to quantify the loss of opportunity less than transparent. Many judgments simply state the amount of the loss of opportunity, without providing the slightest explanation.

Two trends have been developed in the analysis of case law.

The first is the probabilistic approach. This approach focuses on assessing loss of opportunity in percentages. Loss of opportunity starts at 10% and can be compensated up to 100%.

As a general rule, judges calculate probabilities. They assess the probability of the chance occurring, in other words, the probability that the hoped-for event will actually take place. In practical terms, they measure this lost chance by first determining the value of the hoped-for event, and then applying to this sum a factor corresponding to the probability of its realization.

Indeed, the LYON Court of Appeal (“Cour d’appel”), in a ruling, dated September 28, 2023 (no. 21/01340) emphasized the probabilistic approach:

“Consequently, the court approves the first judges’ assessment of the loss of chance at 50%”.
“Evaluated the loss of chance at 50% and ruling again to evaluate it at 90%”.

In a judgment dated September 11, 2009 (no. 09/05089), the Nanterre Regional Court (“Tribunal de grande instance de NANTERRE”) emphasized that:

“Quantifying the extent of this loss of opportunity is a complex process, inspired by a probabilistic approach. In any case, it requires the formulation of a basic assumption, which is decisive for its calculation, that the behaviors involved are those of rational actors with an aversion to risk.
Intuitively, the higher the lost chance, the higher the rate of loss of chance to be applied to the victim’s loss”.

The second approach is lump sum. The prejudice resulting from a loss of chance must be fixed without using a percentage.
Judges estimate the compensation for damage caused by others by invoking lump-sum compensation.

In this case, the loss resulting from a breach of an obligation to provide information is analyzed as a loss of opportunity not to enter into a contract, or not to have been able to enter into a contract on more advantageous terms.

Indeed, the AMIENS Court of Appeal (“Cour d’appel”), in a judgment dated January 31, 2019 (n°14/03848) states that:

“The loss resulting from the loss of opportunity not to contract should be assessed at the sum of 20,000 EUR”.

The loss is fixed as a lump sum, without any assessment of the lost opportunity.

The same court, in NIMES, in a judgment dated December 14, 2017 (n°16/01608) regarding fraudulent concealment, in the context of a sale, considers that the loss:

“Of the possibility of contracting on more advantageous terms (…) must be assessed at 10,000 EUR”.

In conclusion, on the one hand, the Supreme court (“Cour de cassation”) admission of any loss of opportunity is more a philosophical posture than a pragmatic approach. Moreover, this approach has detrimental consequences, particularly in terms of evidence.

Furthermore, the assessment of loss of opportunity often leaves trial judges at a loss. So much so, in fact, that it’s worth asking whether a thorough overhaul of the system might not be appropriate.

Loans: the bank’s duty to warn the borrower, liability action in the event of breach and statute of limitations

Pre-contractual duty to inform for a Loan Agreement

Before taking out a consumer loan, a certain amount of information must be provided in order to study the offer and understand the extent of the borrower’s commitment.
In a large number of cases, lenders have produced clauses in the loan offer signed by the borrower, under which the latter acknowledges having received the pre-contractual information sheet required by law and the expected duty of explanation.
The question of the validity and scope of these clauses inevitably arose. Notable decisions by the European Commission (“Commission européenne”) with unfair contract terms were quick to express their hostility to such clauses. The French High Court (“Cour de cassation”) eventually followed suit.
The duty to warn means knowing what diligent behavior is expected of a banker who complies with his obligation, and what the penalty is for failing to do so. In other words, the questions addressed are those of the content of the duty to warn, and of the damage that can be made good in the event of a breach.
The starting point is a decision regarded as seminal by the French Supreme Court (“Cour de cassation”), dated July 12, 2005 (no. 03-10.921), which emphasized that:
“The banker disregards his obligations towards the borrower by granting him a loan that is excessive in relation to his ability to pay, thus failing in his duty to warn”.
By stating that it is wrong to grant a loan that is excessive in relation to the borrower’s ability to pay, the ruling implied that the banker’s diligent behavior must be to refuse to grant excessive credit.
The doctrine immediately recognized that there was a difficulty here, arising from the banker’s duty not to interfere. And some authors have argued that the warning should rather be understood as an obligation to alert the customer to the level of indebtedness resulting from the loan.
In the same context, there is a duty to inform the customer. This duty has been clearly distinguished from the duty to warn.
It is an intermediary duty in the scale of obligations incumbent on credit institutions, the two extremes of which are the obligation to inform on the one hand, and the obligation to advise on the other.
For the credit institution, the duty to inform is more restrictive than the duty to warn. The duty to inform implies a duty on the part of the credit institution to present the advantages and disadvantages of a transaction to the customer. It is not sufficient to simply point out the risks. However, the duty to warn includes the duty to alert, which is quite similar to the duty to enlighten.
The duty to enlighten is less demanding than the duty to advise, insofar as the credit institution does not have to choose for its customer. It does not have to guide the customer’s decision.
The duty to enlighten, conceived in this way, nevertheless implies a duty on the part of the credit institution to interfere in its customer’s affairs. The credit institution is obliged to carry out investigations, if only to seek out all the information needed to assess the proposed transaction.

Breach of the pre-contractual disclosure obligation for a Loan Agreement

In the event of a breach of the general obligation to provide information, article 1112-1, paragraph 6 of the French Civil Code (“Code civil”) stipulates that:
“In addition to the liability of the party who was bound by it, failure to comply with this duty to inform may result in the annulment of the contract under the conditions set out in articles 1130 and following.”.

Two categories of sanctions are envisaged by this provision:
Implementing the liability of the debtor of the information obligation
Contract voidance

A ruling by the French Supreme Court (“Cour de cassation”) on June 7, 2023, on the grounds of breach of the pre-contractual obligation to provide information, states that:
“The borrower’s signature on the preliminary offer of credit containing a clause to the effect that he acknowledges that the lender, who must provide proof that he has fulfilled his obligations, has given him the standardized European pre-contractual information sheet, constitutes only an indication that it is up to the lender to corroborate with one or more additional elements”.

With this ruling, banks are now reminded of the importance of the pre-contractual obligation to provide information, and the need to be able to establish that the information was actually given.

Statute of limitations and contractual information
(« Prescription et information contractuelle »)

Much has been written on the question of the limitation period for pre-contractual disclosure obligations.

The article 2224 of the French Civil Code (“Code civil”) lays down an a priori simple principle: that of a five-year limitation period. However, the situation quickly becomes complicated when it comes to liability claims for breach of a pre-contractual information obligation.

It should also be noted that even before Law 2008-561 of June 17, 2008 reforming the statute of limitations in civil matters came into force, the  Supreme Court (“Cour de cassation”) held that the statute of limitations for a liability action runs from the date on which the damage occurred, or from the date on which it is revealed to the victim if the latter establishes that he or she had no prior knowledge of it.

In addition, the article L110-4 of the French Commercial Code (“Code de commerce”) states that personal actions are time-barred after five years from the date on which the holder of a right knew or should have known the facts enabling it to be exercised.
Thus, in principle, it will be necessary to demonstrate, in addition to the existence of the lack of information, a prejudice and a causal link between the lack of information and the prejudice.
Since the 2008 reform of the statute of limitations, the five-year period is identical for both contractual and tort claims.
As for the starting point, on the question of breach of the obligation to provide information, according to the Court of Appeal (“Cour d’appel”) it is the date on which the damage occurred, i.e., the due date of the loan.
There is nothing to suggest that the situation would have been any different if liability had arisen in tort rather than in contract.

The attainment of the loss of opportunity
(« Réalisation de la perte de chance »)

The notion of loss of opportunity is rather complex, as it is ambiguous. It can refer to both the disappearance of the probability of obtaining an advantage and the disappearance of the possibility of avoiding a loss.
Strictly speaking, loss of chance can be understood as the disappearance of the probability of obtaining an advantage, but the risk that could designate the existence of a probability of suffering a loss.
Compensation for the loss of an opportunity requires certain conditions that are not as clear-cut in the case of compensation for risk, which may correspond more to a future loss whose occurrence is to be prevented.
The Supreme Court (“Court of Cassation”) recitals have a powerful influence, since they imply that any breach of the duty to inform or fraud automatically creates a loss, which must be compensated.
In this case, the loss resulting from a breach of an obligation to provide information is analyzed as a loss of opportunity not to contract or not to have been able to contract on more advantageous terms.
Indeed, the Court of Appeal of AMIENS (“Cour d’appel”) in a judgment dated January 31, 2019 (n°14/03848) states that:
“The loss resulting from the loss of opportunity not to contract should be assessed at the sum of 20,000 EUR”.
The same jurisdiction, in NIMES by a judgment dated December 14, 2017 (n°16/01608) concerning a fraudulent concealment, in the context, of a sale considers that the loss:
“Of the possibility of contracting on more advantageous terms (…) must be assessed at 10,000 EUR”.

• Tax departments: 

1. Individual tax departments (SIP); 
2. Business tax departments (SIE); 
3. Property tax centers; 
4. Registration centers; 
5. Land registry services.

• The activities of the Public Finance Department (DGFIP hereafter) in terms of economic and financial expertise and action: 

Thanks to its expertise in financial and accounting matters, the DGFiP provides advisory services in these fields to prefects and local public decision-makers. It also works on behalf of businesses with other local economic players.

The DGFiP’s main missions in the fields of taxation and public management are to assess taxes, control tax returns, identify property assets and keep records of real estate, collect public revenues, control and execute public expenditure, produce budgetary and accounting information, provide financial expertise and consultancy services, manage the Treasury’s cash deposits and steer the State’s real estate strategy. It is also responsible for coordinating and coordinating state pensions.

The DGFiP includes within it the tax legislation department which designs and develops the legislative and regulatory provisions of a tax nature as well as the general instructions necessary for their application. Its mission is also to ensure the conduct of international tax relations (negotiation and interpretation of tax conventions, amicable procedures, transfer pricing taxation, European tax negotiations, work of international organizations).

• Competence of the DGFiP for direct taxes and turnover taxes in matters of income tax:

The departmental commission for direct taxes and turnover taxes intervenes when the disagreement concerns one of the following areas:

1. a) the amount of the industrial and commercial, non-commercial, agricultural result or turnover, determined according to a real method of taxation (the commission is therefore competent when the company’s result is in deficit);

1. b) the conditions for application of tax exemption or reduction regimes in favor of new businesses, with the exception of the classification of research expenses mentioned in Article 244 quarter B of the General Tax Code:

“Personnel expenses relating to researchers and research technicians directly and exclusively assigned to these operations. When these expenses relate to persons holding a doctorate, within the meaning of Article L. 612-7 of the Education Code, or an equivalent diploma, they are taken into account for double their amount. during the first twenty-four months following their first recruitment provided that the employment contract of these people is of indefinite duration and that the number of salaried research staff of the company is not less than that of the previous year”  ;

1. c) Application of article 39 of the General Tax Code:

“The net profit is established after deduction of all expenses, these including.”

relating to non-deductible remuneration for the determination of the results of industrial or commercial companies must mention on the statement provided for in Article 54 quater of the General Tax Code:

“Companies are required to provide, in support of the declaration of their results for each financial year, a detailed statement of the categories of expenditure referred to in 5 of Article 39 (1), when they exceed a certain amount fixed by order of the Minister responsible for the economy and finance, as well as the detailed statement of the expenses mentioned in the third paragraph of article 238 A and deducted for the establishment of their tax” .

1. d) The market value of buildings, business assets, interests, shares or shares in real estate companies serving as the basis for the value added tax.

• Competence of the DGFiP for direct taxes and turnover taxes in matters of turnover taxes:

The departmental commission for direct taxes and turnover taxes is called upon, in matters of turnover taxes, to give its opinion on disagreements that may arise between the administration and taxable persons regarding increases. relating to the turnover determined according to an actual tax regime or to the market value of goods falling within the scope of real estate VAT.

1. a) Turnover determined according to the actual turnover regime

Article L. 59 A of the Book of Tax Procedures provides that any disagreement between the taxpayer and the Administration may be submitted at the request of the taxpayer or on the initiative of the department to the departmental commission under the conditions set by article L. 59 of the Book of Tax Procedures, when it relates to the amount of turnover determined according to the real regime or the simplified real regime.

• Competence of the DGFiP for direct taxes and turnover taxes in matters of local direct taxes:

The departmental commission may be called upon, during the work on the basis of local direct taxes, to participate in the determination:

1. a) assessment rates for undeveloped properties;
2. b) the rental value of built properties, as well as the periodic updating of rental values.

The tax service harmonizes the assessment elements from municipality to municipality, finalizes them and notifies them to the mayor for display at the town hall within five days.

Within three months following the posting, these elements can be contested both by the mayor, duly authorized by the municipal council, and by the owners and tenants, on the condition that the complainants own or rent more than one tenth of the total number of premises in the municipality or municipal sector concerned, each premises being counted only once.

The dispute is submitted to the departmental commission which makes a final decision.

• Tax prescription:

1. The general rules applicable to tax prescription:

In accordance with the provisions of article L.173 of the book of tax procedures, in matters of property tax and housing tax, the deadline for recovery from the tax administration is in principle one year:

“For direct taxes collected for the benefit of local authorities and taxes collected on the same bases for the benefit of various organizations, with the exception of the property tax of businesses, the contribution on the added value of businesses and their additional taxes, the right to resume tax administration is exercised until the end of the year following that for which the tax is due.”

It is thus exercised until the end of the year following that for which the tax is due.

This very short period is explained by the fact that these taxes are not declared by the taxpayer.

Article L.173 of the tax procedures book provides that this period can be extended to 3 years when the taxpayer has been able to benefit from an exemption from these taxes based on his income, and his income tax has been subject to rectification.

That being said, the tax administration’s common law recovery period expires, in matters of income tax and corporate tax, at the end of the third year following that for which the tax is imposed. due.

For example, for income for the year 2022 (declared in spring 2023), the tax administration recovery deadline will expire on December 31, 2025.

The recovery period can however be extended to 10 years (instead of 3 years) in certain special cases.

This is in particular the hypothesis of the exercise by the taxpayer of a hidden activity (that is to say an activity for which the taxpayer has made no tax declaration, and which he has not declared officially).

The tax limitation period also increases to 10 years when the taxpayer has not declared his bank accounts abroad, his life insurance contracts taken out with an organization established abroad, or accounts of digital assets held abroad.

The same applies in particular in the absence of declaration of having held in a trust abroad.

For bank accounts abroad, the recovery period increases to three years if the taxpayer proves that the total credit balances of his accounts abroad did not exceed 50,000 euros at any time during the year. under which this declaration was to be made.

In matters of VAT, the tax administration’s right of recovery runs until the end of the 3rd year following the year in which this tax became payable.

With regard to the CFE (business property tax), the recovery period expires on December 31 of the third year following that for which this tax is due.

This period may exceptionally be extended from 3 years to 10 years in the event that the taxpayer exercises a hidden activity.

However, in accordance with the provisions of articles L.180 and L.186 of the book of tax procedures, in terms of registration fees and IFI (real estate wealth tax), the recovery period runs until December 31 of the third year following that during which these duties and taxes become payable.

This three-year period assumes, in terms of registration and IFIs, that the rights and taxes have been sufficiently disclosed to the tax administration (via a specific act or declaration).

In the absence of a declaration or act presented for the registration formality, the recovery period then increases from 3 years to 6 years from the date of the event giving rise to the tax (for example the death of the taxpayer in matters of inheritance tax, or January 1 of the tax year in matters of IFI).

In all cases, the tax administration must establish the tax, by issuing a roll or a recovery notice, before the recovery period expires.

Note that the above elements concern the tax administration’s right of recovery in terms of basis.

In terms of recovery of the tax itself, public accountants have a period of 4 years, from the day of recovery of the roll (or sending of the notice of recovery) to obtain settlement of the taxpayer’s tax debt.

The limitation period for the recovery action is acquired in the absence of an interrupting act (such as a formal notice to pay the tax) or suspensive act (such as a request for suspension of payment on the taxpayer’s side) within the allotted period.

1. Cases of interruption or extension of the tax limitation period:

The tax administration recovery period may be interrupted in certain cases.

In case of interruption At the end of the recovery period, the tax administration then benefits from a new period to collect the rectified duties and taxes.

A proposed rectification may interrupt the tax administration’s recovery period, provided that it is notified before the end of this period.

This notification has the effect of interrupting the limitation period within the limit of the amount of the proposed rectifications (except in the event of possible procedural defects).

The recovery period may also be interrupted in the event of automatic notification of tax bases to the taxpayer concerned.

The limitation period may also be interrupted by declarations or notifications of minutes, as well as by any act which would involve an acknowledgment on the part of the taxpayer of the tax debt (for example a request for payment deadline).

Can also interrupt the limitation period of legal claims, as well as acts of forced execution.

However, the deadline for taking over the tax administration may be extended in the event of a request for international administrative assistance.

In this regard, article L. 188 A of the tax procedures book provides that:

“When the administration has, within the initial recovery period, requested from the competent authority of another State or territory information concerning a taxpayer, it may repair the omissions or tax inadequacies relating to this request, even if the initial recovery period has expired, until the end of the year following that of receipt of the response and, at the latest, until December 31 of the third year following that for which the period initial recovery time has expired.

This article applies to the extent that the taxpayer has been informed of the existence of the request for information within the period of sixty days following its sending as well as of the intervention of the response from the competent authority of the other State or territory within sixty days following its receipt by the administration.”

The limitation period is extended until the end of the year following that of the response from the other State, and at the latest until December 31 of the third year following the initial recovery deadline.

The extension of the recovery period requires compliance with certain conditions, and in particular that the request for international administrative assistance is made within the initial recovery period.

Furthermore, article L.188 B of the tax procedures book provides:

“When the administration has, within the recovery period, filed a complaint leading to the opening of a judicial investigation for tax fraud in the cases referred to in 1° to 5° of II of Article L. 228, omissions or insufficiencies in taxation relating to the period covered by the recovery period may, even if it has expired, be repaired until the end of the year following the decision which puts an end to the procedure and, at the latest, until the end of the tenth year following that for which the tax is due”.

An extension of the recovery period is considered in the event of the opening of a legal investigation for tax fraud. In this case, the limitation period is extended until December 31 of the year following the decision of the Public Prosecutor’s Office, and at the latest until December 31 of the tenth year following that of the imposition.

In addition, article L.187 of the French tax code states:

“When the administration, having discovered that a taxpayer has engaged in fraudulent conduct, has lodged a complaint against him or her, it may carry out checks and make adjustments in respect of the two years exceeding the ordinary limitation period. This extension applies to the perpetrators of the fraud, their accomplices and, where applicable, the persons on whose behalf the fraud was committed.

Pending the decision of the criminal court, and provided that the taxpayer lodges guarantee under the conditions set out in articles L. 277 to L. 280, the collection of taxes corresponding to the period exceeding the ordinary limitation period is suspended. These taxes lapse if the legal proceedings end with a dismissal order or if the persons prosecuted are acquitted”.

The tax authorities are also planning to extend the recovery period if a complaint is lodged for tax fraud.

This is the case when, in the course of a tax audit, the tax authorities discover fraudulent behavior on the part of the taxpayer, leading them to lodge a complaint for tax fraud.

In this case, the tax reassessment period is extended by two years, enabling the tax authorities to issue tax reassessments for the two years preceding the period initially audited.