Out-of-court settlements with tax authorities: the position in France

Taxpayers may seek to reach an out-of-court settlement with a tax authority for various reasons, including reaching a swift(er) conclusion, mitigating the risk inherent in all litigation and avoiding adverse publicity.

This blog post explores the main settlement procedures available in France for taxpayers facing a dispute with the French tax authorities, building on the overview in the French section of our Tax investigations and disputes across borders guide.

Tax transaction (transaction fiscale) 

Taxpayers may request a reduction of interest and penalties via a ‘tax transaction’ in the context of a tax dispute, where such interest and penalties (and, as the case may be, the corresponding tax liability) are not yet final. However, taxpayers cannot mitigate their principal tax liability through a tax transaction, which is an important limitation to this mechanism. In return for their interest and penalties being reduced, taxpayers commit to: (a) pay to the Treasury that reduced amount as determined by the French tax authorities, on top on the tax liability due, and (b) not litigate the case. Once the tax transaction has been approved and implemented by the relevant taxpayer, neither the taxpayer nor the French tax authorities can litigate the case anymore.

According to data published by the French tax authorities, the use of this procedure has increased significantly in recent years: in 2019, 3,841 settlements were reached in this way; by 2022, this number had risen to 5,485. 

Overall settlement (règlement d’ensemble)

Overall settlements usually concern complex matters, the legal analysis of which is uncertain. Both principal tax liabilities and penalties may be mitigated through such settlements. Contrary to ‘tax transactions’, which are provided by law, overall settlements are a creation of the French tax authorities’ practice. From the French tax authorities’ perspective, overall settlements are used with the aim of accelerating the treatment of a case, improving tax collection and limiting litigation risk. 

The taxpayer must commit not to litigate the case, but because overall settlements are not governed by law, such commitment is not legally binding on the taxpayer. In practice, once an agreement on an overall settlement is reached, the French tax authorities would seek to secure the agreement on the penalties through a tax transaction to provide more certainty.

Although markedly less common than the tax transaction procedure, the use of this settlement procedure has also increased dramatically in recent years: up almost 300 per cent. between 2019 and 2022 according to data published by the French tax authorities.

CJIP (convention judiciaire d’intérêt public)

A specific settlement procedure is available for criminal disputes involving allegations of tax fraud and related offenses: the CJIP. CJIPs (in the context of other alleged criminal offences) were introduced into French law in 2016, before being extended to tax fraud offences in 2018.  They provide a mechanism by which legal entities can agree to comply with certain conditions in return for their prosecution being extinguished.  Such obligations, which may be alternative or cumulative, may consist of:

• the payment of a ‘public interest fine’ to the French Treasury, the amount of which must not exceed 30 per cent. of the average annual turnover of the company (computed based on the last 3 turnovers known for the company);
• the implementation, under supervision, of a program to bring the taxpayer’s anti-corruption and prevention procedures into compliance, for a maximum period of 3 years; and/or
• the compensation of the victims’ damages, if any.

CJIPs are entered into by the taxpayer and the French public prosecutor – not the tax authorities – and must be approved by a judge to be effective.

Unsurprisingly given the criminal context, CJIPs remain relatively unusual in practice. In 2022, 3 CJIPs were entered into in the context of tax matters (2 in 2019, 1 in 2020, and 1 in 2021). 

SMEC (Service de Mise en Conformité Fiscale)

Finally, a specific remediation procedure was made available to taxpayers in 2019, via the newly-established ‘corporate compliance’ department of the French tax authorities (the ‘SMEC’).

This department can be approached voluntarily by corporate taxpayers (and individual taxpayers in specified situations), before an investigation or audit is started by the French tax authorities.  The SMEC can be approached in the following circumstances:

1. to disclose a tax anomaly discovered by new owners of a company;
2. to disclose an undeclared activity carried out in France, characterising a permanent establishment;
3. to disclose a deduction of interest expenses incurred on a loan granted by a foreign entity, in contradiction with French tax rules;
4. to disclose an illegal or abusive arrangement similar to one of the arrangements featuring on a list published by the French tax authorities, or involving foreign entities;
5. to disclose certain matters relating to corporate officers’ taxation (ie matters relating to the impatriates tax regime; the non-taxation of a capital gain derived from the sale of shares; conditions of a so-called “Dutreil” arrangement (relevant for French inheritance tax purposes) not being met; and other certain specified arrangements, including management packages);
6. to disclose any transaction likely to be subject to penalties for hidden activity (activité occulte), abuse of law (abus de droit) or fraud (manoeuvres frauduleuses); or
7. to disclose any transaction in relation to which compliance raises difficulties, either for quantifying the amount of any tax adjustments or for assessing the taxable periods, or for managing difficulties resulting from the number of taxpayers involved in the transaction. 

In order to regularise its tax situation via the SMEC, the taxpayer must pay all French taxes due – in return for which applicable penalties will be reduced (penalties of 80 per cent. will be reduced to 30 per cent.; penalties of 40 per cent. will be reduced to 15 per cent.; penalties of 10 per cent. will be reduced to 0 per cent.; and late payment interest will be reduced by 40 per cent. or 50 per cent.).

There is limited public data regarding the use of the SMEC. At a conference in September 2023, representatives of the SMEC indicated that the matters they handled were principally: (a) matters in relation to which quantifying the amount of any tax adjustments raised difficulties or matters raising processing difficulties resulting from the number of taxpayers involved (37 per cent.); and (b) undisclosed permanent establishment matters (26 per cent.).

How does this compare with other jurisdictions?

As explored further in our Tax investigations and disputes across borders guide, the rules surrounding out-of-court settlement with tax authorities vary between jurisdictions.  For example:

• settlement options are also available in the Netherlands, but the Dutch tax authorities can only settle tax liabilities, not penalties or interest; 
• French CJIPs have been inspired by the deferred prosecution agreements (DPAs) tax authorities in the US and the UK can enter into; and
• conversely, settlement options are much more restrictive in Austria, Germany and Spain.

Our local teams can assist multinational businesses in conflict with tax authorities in exploring the settlement options in each relevant jurisdiction. 

If you would like to discuss any of the points raised in the guide or this blog post in further detail, please contact the authors, our tax investigations and disputes team or your usual Freshfields contact.