A company purchased mutual fund shares in conditions which led the French Tax Administration to consider the tax credit related to such shares to be fictitious, and therefore to fall within the scope of application of the abuse of law procedure provided for by French tax law.
In a 1983 instruction (superseded in 1989), French tax authorities accepted that unitary tax credits attached to dividends paid by French mutual funds should be computed according to the number of the fund's shares existing at the end of its fiscal year. This unitary tax credit was used to determine the tax credit attached to the fund's distribution, even if new shareholders entered the fund at a time between the end of the fiscal year and the distribution. Shareholders who subscribed to the mutual fund a few days prior to distribution and who sold their shares a few days after distribution could therefore benefit from both the dividend and the tax credit attached to the share. Although neutral from a financial point of view, the scheme generated large profits in the form of tax credit, enabling certain corporate taxpayers to reduce significantly their tax liability to the French treasury.
In a decision dated October 22, 1996, the Administrative Court of Paris ruled that a company which had benefited from a large tax credit under this scheme could not deny being aware of the real nature of the transaction to which it had been a party, and that it had knowingly participated in a scheme the only objective of which was to elude taxation. The abuse of law procedure was therefore applicable to the company.
This is the first ruling in this particular area (commonly known as the "Fonds Turbo" scheme). This tax loophole is said to have cost the French treasury between 4 and 7 billion French Francs in loss of revenues.
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