The French Administrative Supreme Court’s recent case law has effectively reduced the two abuse of law conditions to one in the case of artificial arrangements. In addition to posing difficulties in terms of legal certainty, this approach clashes with the stance adopted by the Court of Justice of the European Union (CJEU).

The influence of European case law on the French law definition of abuse of law 

The abuse of law principle, as set out in Article L. 64 of the French Tax Procedures Code, allows the French tax authorities to disregard transactions or arrangements where two conditions are cumulatively met: on the one hand, the transactions at issue must be solely tax-driven (subjective condition) and, on the other hand, the arrangements put in place by the taxpayer must be contrary to the objectives of the legislator (objective condition). The two conditions for abuse of law under French law arose out of the CJEU’s case law.

The CJEU held, for the first time in 2000, that a finding of an abuse requires, first “a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved” and, second, “a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it” (CJEC, 14 December 2000, case C-110/99, Emsland-Stärke GmbH and CJEC, 21 February 2006, case C-255/02, Halifax).

Subsequently, the French Administrative Supreme Court incorporated the two conditions for abuse of law into its case law (see Conseil d’État, 27 September 2006, no. 260050, Sté Janfin and Conseil d’État, 28 February 2007, no. 284565, Persicot), and the French legislator amended article L. 64 of the French Tax Procedures Code in 2008 to adopt the two-pronged abuse of law test.

French case law departs from the legal conditions in the case of an artificial arrangement

Since 2017, the French Administrative Supreme Court has consistently held that when there is an artificial arrangement, the objective condition for an abuse of law is necessarily met. This approach stems from the idea that creating an artificial arrangement to benefit from specific provisions is necessarily contrary to the objective pursued by the legislator. In doing so, the French Administrative Supreme Court effectively releases the French tax authorities from the burden of proof with respect to the objective condition.

This evolution in case law is attributable to various landmark rulings. In particular, the French Administrative Supreme Court held that the French tax authorities could invoke the grounds of abuse of law in the event of double taxation treaty fraud, and ruled that “the States which are party to the France-Luxembourg double taxation treaty cannot be regarded as having intended, in order to allocate taxing power, to apply its stipulations to situations arising from artificial arrangements devoid of any economic substance” (Conseil d’État, 25 October 2017, no. 396954, Cts Verdannet). Moreover, the French Administrative Supreme Court recognized that the French tax authorities may implement the abuse of law procedure if they demonstrate, through objective elements, that the situation by reason of which the taxpayer falls within the scope of the provisions of the law “proceeds from an artificial arrangement, devoid of any substance and established with no other purpose than to avoid or mitigate tax” (Conseil d’État, 28 October 2020, no. 428048, Charbit).  

Since then, this approach to applying the abuse of law principle has been confirmed by many rulings. While the objectives pursued by the legislator are traditionally assessed by examining the specific terms they chose when drafting the provision, the general scheme of the legal provision or the legislative history and preparatory work leading to its adoption, the French Administrative Supreme Court now refers, with respect to artificial arrangements, to a general overarching objective inherent to all tax provisions: rendering artificial arrangements inoperative. It rules accordingly even if the preparatory work reveals that the legislator’s intention was in fact respected (Conseil d’État, 27 January 2023, no. 463883, Sté Orange): in this respect, current French case law introduces a legal fiction.

Although a similar shift had been initiated in Italy, where the tax authorities tended to dispense with the need to check whether an artificial arrangement was contrary to the legislator’s objective, it is interesting to note that the Italian legislator reaffirmed in 2015 the two conditions for abuse of law, prompted by the European Commission’s recommendation (2012/772/EU).

French case law at odds with the CJEU’s approach

Even though the concept of artificial arrangement stems from European case law (see for instance CJEC, 12 September 2006, case C-196/04, Cadbury Schweppes), the CJEU refused to apply a similar reasoning with regards to abuse of law. As European case law currently stands, the existence of an artificial arrangement does not release tax authorities from having to prove that the objective condition of abuse of law is met.

The CJEU reasserted its position on this matter in 2017, when it was asked by the Irish Supreme Court to assess the objective condition for abuse of law, in a case where the prior conclusion of long-term leases and their termination shortly afterwards had enabled VAT-free sales to be carried out, generating overall tax savings. The European Commission proposed to consider that the transactions in question were contrary to the purpose of the relevant provisions of the VAT Directive, insofar as the purpose of these provisions was the taxation of the real, substantive transactions.

In line with its consistent case law and the conclusions of its Advocate General, the CJEU, after referring to the objective condition for abuse of law as set out in its prior rulings, examined the purpose of the relevant provisions of the VAT Directive. The CJEU deduced from its assessment that the exemption “relates to supplies of immovable property occurring after the property has actually been used by its owner or its tenant”. In its view, the wholly artificial nature of the transactions is an element “capable of demonstrating that the accrual of a tax advantage constitutes the essential aim pursued” (CJEU, 22 November 2017, case C-251/16, Edward Cussens).

In doing so, the CJEU upheld its established case law according to which artificiality is assessed in light of the objectives of the relevant legislation (CJEC, 12 September 2006, case C-196/04, Cadbury Schweppes and CJEU, 26 February 2019, case C-135/17, X GmbH). It should be noted that the CJEU’s approach to abuse of law in the context of artificial arrangements was not undermined by the Danish cases of 2019 (CJEU, 26 February 2019, cases C-116/16 and C-117/16, T Danmark and Others. and cases C-115/16, C-118/16, C-119/16 and C-299/16, N Luxembourg 1 and Others.).

If confirmed, this divergence of approach between French case law and European case law would certainly raise difficulties, particularly if tax authorities were to disregard an artificial arrangement with respect to VAT, without ascertaining that the arrangement is contrary to the specific objectives pursued by the legislator.

Finally, in addition to being problematic in terms of legal certainty, the conflation of abuse of law conditions pursuant to French case law in the context of artificial arrangements is of great concern in view of the repressive nature of abuse of law provisions under French law, as the application of such provisions carries heavy penalties and may result in referral of the case to the public prosecutor’s office.