France Pursues Tax Fraud Facilitators

French tax authorities are doubling down on high-profile tax fraud investigations these days.

In March a French court convicted a billionaire art dealer of tax fraud in a sprawling case that alleged Guy Wildenstein, head of the famed Wildenstein art family, avoided paying millions of euros in inheritance taxes through a network of trusts.

Meanwhile, Lactalis — the world’s largest dairy company — is under significant investigation over allegations that it evaded “several hundred million euros” in taxes over the years, according to French newspaper Le Monde. Authorities raided several company properties and the CEO’s Paris home in February, but little information has publicly been shared since then.

In late 2023, French actress Isabelle Adjani was fined €250,000 and handed a suspended prison sentence after a court found that she falsely declared her residency in Portugal for two years. Adjani has maintained her innocence, also according to Le Monde.

French lawmakers want more investigations, but domestic laws haven’t always supported this goal. For example, it has historically been difficult to prosecute firms and individuals that enable tax fraud on behalf of their clients.

France’s Finance Act 2024 offers a solution: It creates a new criminal offense targeting individuals and entities that provide instruments to facilitate tax fraud. The penalties are steep — offenders can face jail time and hundreds of thousands or even millions of euros in fines, and firms can be ordered to suspend or close their operations.

The measure, article 1744, went live at the beginning of the year and is an escalation of France’s fight against criminal tax activity. However, it raises some questions about the scope and depth of France’s willingness to prosecute third parties for facilitation offenses.

France’s Provision

Why does France need to pursue fraud facilitators? Over the years, French law enforcement has been able to prosecute facilitators only if there was a conviction for the underlying tax fraud. Also, tax scheme promoters could only be prosecuted on a case-by-case basis for tax fraud committed by each of their clients, even though they might engage in a larger enterprise and assist many taxpayers, according to a legislative explanatory memo.

French lawmakers want to prosecute tax fraud faster and better. They’re hoping that this new, separate offense will enable that.

“The possibility of directly initiating criminal proceedings against the alleged organizer of a complex or aggravated tax fraud scheme will make it possible to quickly mobilize judicial investigation resources that will enable the fraudulent scheme in question to be more effectively and comprehensively understood,” the memo said.

Article 1744, in Section I states that parties that provide one or more legal, tax, accounting, or financial means, services, acts, or instruments intended to enable one or more third parties to fraudulently evade the establishment or total or partial payment of taxes referred to in the general tax code shall be punishable by three years’ imprisonment and a fine of €250,000. This applies whether the services are offered free of charge or for a fee. Covered means, services, acts, or instruments are:

1. opening accounts or entering contracts with organizations established abroad;
2. the interposition of natural or legal persons or organizations, trusts, or comparable institutions established abroad;
3. providing a false identity or false documents, or any other falsification;
4. providing or justifying a fictitious or artificial tax domicile abroad; or
5. carrying out any other maneuver intended to mislead the administration.

For cases in which any of the above offenses are committed via an online public communication service, the penalties are higher: five years’ imprisonment and a €500,000 fine.

Section II notes that several articles of the Book of Tax Procedures — articles L. 227 to L. 233 — do not apply. This is noteworthy because some of those articles describe how the government should establish its fraud cases. For example, L. 227 requires prosecutors and tax authorities to show that the tax evasion or evasion attempt was intentional. Removing these requirements indicates that the government can establish a facilitation case faster.

Section III establishes that natural persons who violate the law will be subject to additional penalties under articles 1741 and 1750 of the general tax code. The stakes here are pretty high. Under article 1741, individuals who evade or attempt to evade a tax payment or assessment could face up to five years’ imprisonment and a fine of €500,000 or double the proceeds of an offense. (Petroff Law Firm, “Article 1741 of the French General Tax Code,” Nov. 7, 2023 [unofficial translation].) Those numbers jump to seven years’ imprisonment and a fine of €3 million or double the proceeds of an offense if the fraudulent acts involve offshore activity. Under article 1750, any person found guilty of a tax offense shall be prohibited from professional practice and subject to a suspension of their driver’s license for up to three years, or six years in the case of a repeat offense.

Section IV establishes that legal entities like law firms and accounting firms that violate the law and are found criminally liable under article 121-2 of the criminal code will incur multiple penalties and fines. Under article 121-2, legal persons can be held criminally liable for offenses committed on their behalf by representatives.

Those penalties and fines, under articles 131-139 of the criminal code, mean that law firms, accounting firms, banks, and other legal entities could face fines between €2.5 million and €15 million. Legal entities could also face bans from professional activity or dissolution of their business, according to the law.

Some Open Questions

While article 1744 indicates that firms and companies can be held liable for the actions of their employees or intermediaries, it is unclear how far that liability attaches. For example, can a firm be held liable for the acts of an employee who acts without the knowledge or consent of senior management? The government says that businesses cannot be held criminally liable if the offending employee acted without an explicit delegation of power or the employee does not conduct “particular functions” within the company. Ultimately, it seems the answer to this question will be based on facts and circumstances. Another question is whether firms can claim a defense against the actions of their employees or agents. For example, would a robust compliance program or other reasonable prevention procedures be enough to shield a firm from liability? As for an extraterritorial scope, Section III is clear that parties can be held liable for activities that could defraud French tax authorities but occur offshore. What about cases with activity that violates another country’s tax laws — not French law — but is facilitated by a French firm or an associated individual?

If a criminal offense is conducted in a foreign country, but is aided and abetted in France, then liability could attach under article 113-5 of the criminal code. However, two key conditions must be met under that article: The offense must be criminal in both France and the foreign country, and a foreign court must have issued a conviction. In this case, article 1744 addresses domestic tax evasion and does not mention foreign tax offenses, so it appears the first prong of the test would not apply and article 1744 would not apply to foreign law offenses.

Source: https://www.forbes.com/sites/taxnotes/2024/09/09/france-pursues-tax-fraud-facilitators/