France: Trend of a record number of criminal transactions for tax fraud cases

published on 6 April 2023 | reading time approx. 2 minutes

The trend in France is increasingly towards the criminalization of tax fraud cases, which represent a more and more important financial interest for the French government. Indeed, very large companies such as Carmignac Gestion, Google or JP Morgan Chase, have recently been prosecuted in France for tax frauds or complicity in tax frauds.

It should be remembered that criminal proceedings for tax fraud can be initiated either by filing criminal charges for tax fraud, or via a compulsory denunciation to the Public Prosecutor's Office by the tax authorities, when in particular the additional reassessed taxes exceed 100,000 euros and with the application of specific penalties (with percentage thresholds varying according to the situations concerned).

In addition to the tax reassessments and penalties that can be very substantial in the context of a contentious tax audit, criminal proceedings for tax fraud can lead to criminal fines of up to ten times the proceeds of the tax offence (notwithstanding other penalties, including imprisonment).

Companies prosecuted in this context of criminalization are increasingly resorting to the judicial public interest agreement (CJIP). This allows the Public Prosecutor's Office to agree with the taxpayer on the payment of a criminal fine that is proportionate to the benefits derived from the offences, but up to a limit of 30 % of the average turnover of the last three financial years, all without a declaration of guilt by the prosecuted company, but subject to a validation of the CJIP by a judge.

For the purpose of information, it should also be mentioned that the conclusion of a CJIP may, in theory, give rise to a compliance penalty designed to ensure the existence, quality and effective implementation of a compliance program designed to prevent the repetition of the offending practices.

As the criminal procedure is in principle parallel to the tax adjustment procedure, the recent guidelines of the National Financial Prosecutor's Office (PNF) require that a tax outcome between the taxpayer and the tax authorities must be found before or at the same time as a CJIP is concluded.

In May 2022, a new record CJIP was concluded with several companies of the McDonald's group for an amount of € 1.25 billion, including back taxes and penalties to be paid back to the Treasury. By comparison, Google had concluded a CJIP for € 500 million.

In this McDonald's case, the proceedings were initiated by the workers’ council of one of the companies of the group in France. Presented in a very simplified way, the lawsuits concerned the fact that the masterfranchise fee was increased from 5 % to 10 %, calculated on the turnover of the restaurants operated in France, and which was no longer paid to the American group but to a Luxembourg company of the group. Because of this change in the transfer pricing policy, among other things, the plaintiffs and the French tax authorities considered that there was an artificial reduction in the profits attributable to France.

Even more recently, the press (Le Monde, 28 March 2023) reported that several simultaneous search warrants took place in Paris and La Défense on March 28^th at various major banks. Without directly naming the banks concerned, a PNF press release of the same day confirms that these searches took place in the context of preliminary investigations into the "CumCum" scheme. 150 investigators from the Financial Judicial Investigation Service (SEJF), attached to the Finance Ministry, 16 prosecutors spread over the different sites, as well as 6 German prosecutors from the Cologne public prosecutor's office, within the framework of mutual legal assistance between France and Germany, have taken part in this search.

In its press release, the PNF explains that the practice of "CumCum" would consist of a foreign shareholder of a listed company in France temporarily transferring, around the date of the dividend payment, the shares he holds to a French bank, in order to avoid the payment of the withholding tax applied on the payment of this dividend.

If these searches lead to incriminating evidence, it is likely that one or more CJIPs will be concluded with the financial institution(s) ultimately charged.

The criminal aspect, in particular because of its potentially significant additional financial consequences, is therefore becoming increasingly important in tax fraud cases, alongside the tax adjustments themselves.