On 27 September, one of the key measures introduced by the recent Anti-Fraud Law (which was adopted by the French Parliament on 23 October 2018) has been confirmed by the French Constitutional Council.

This important decision is in response to a request for a preliminary ruling on a question of constitutionality submitted by the French supreme administrative court on 1 July 2019 relating, in particular, to whether the automatic transfer of certain tax cases to the Public Prosecutor complies with the Constitutional principle of equality before the law.

The Anti-Fraud Law has indeed introduced a reform of criminal proceedings whereby the French Tax Authorities must refer any fact discovered in the context of a tax audit to the Public Prosecutor, when such facts (i) triggered reassessed taxes of more than €100,000 and (ii) led to the application of the following tax penalties:

• 100% penalty (for obstructing the tax audit),
• 80% penalty (e.g., for concealed activities, abuse of law or fraudulent acts); or
• 40% penalty for willful misconduct, failure to file a declaration within 30 days of notice or abuse of law, when the taxpayer has already, during the six preceding calendar years, been subject to such tax penalties (the above-mentioned 100%, 80% or 40% penalties) in a previous tax audit or has previously been the object of a criminal complaint.

In support of the claim that this measure could be in breach of the principle of equality before the law, it was notably argued that if the reassessed taxes did not reach the €100,000 threshold, or if the taxpayer was in a tax-loss position which prevents the French Tax Authorities from applying penalties, the same facts as those falling within the scope of the automatic transfer could only lead to prosecution if the French Tax Authorities lodged a criminal complaint for tax fraud against the taxpayer, which requires a prior binding decision of the Tax Offences Committee (Commission des infractions fiscales).

In its decision, the French Constitutional Council has dismissed all the arguments put forward and has ruled that the automatic transfer of the relevant tax cases to the Public Prosecutor is compliant with Constitutional principles including the principle of equality before the law as well as the principle that sentences must be specific to the offender.

Having now been confirmed, this reform is expected to have a significant impact on the number, nature and scope of criminal proceedings relating to tax fraud. It is anticipated that circa 2,000 cases will be automatically referred to the French Public Prosecutor each year (while an average of 1,000 criminal complaints per year were filed for tax fraud in the last five years). More importantly, the automatic transfer of certain tax cases will include situations which until now would probably not have been referred to the Public Prosecutor (e.g., CFC or TP reassessments, when these reassessments trigger the 80% penalty, or in the case of successive reassessments triggering the 40% penalty at least twice over the six-year reference period). In this respect, the Anti-Fraud Law is a game changer in the way tax structuring should be envisaged and tax audits handled.