Can the tax authorities go back on their own position?

The tax authorities cannot always call into question a position they have previously accepted. Where a taxpayer has relied on an official interpretation of the law or obtained a favourable tax ruling, they may, under certain conditions, be protected against a later change of position.

This protection is of particular value to taxpayers who wish to secure a wealth planning transaction, carry out a restructuring or determine the tax consequences of settling in France.

Articles L. 80 A and L. 80 B of the French Tax Procedures Code (Livre des procédures fiscales, LPF) provide for several guarantees limiting the risk of the tax authorities calling into question positions they had previously accepted.

It is still necessary to identify the applicable mechanism, to frame the request correctly and to know the limits of the protection obtained.

1. Change in tax doctrine: what guarantees for the taxpayer?

Can the tax authorities change their interpretation of tax law retroactively?

The tax authorities publish their commentary on and interpretation of tax legislation in the Official Public Finance Bulletin (BOFiP-Impôts).

Article L. 80 A of the LPF allows a taxpayer, under certain conditions, to rely on a published administrative interpretation where they complied with it before it was amended or withdrawn.

A later change of doctrine therefore does not, in principle, allow an assessment made in accordance with the previously accepted interpretation to be called into question retroactively.

This guarantee is of particular value where the tax authorities had adopted an interpretation more favourable than a strict reading of tax legislation would allow.

It is not, however, an absolute protection: an amendment of the applicable legislation may render the earlier doctrine obsolete.

How can a position taken by the tax authorities be relied on in a tax audit?

Beyond published commentary, certain individual positions taken by the tax authorities may also be relied on against them.

They must reflect a formal assessment that is sufficiently precise and free from ambiguity. The mere fact that a return was accepted, or that a previous audit gave rise to no reassessment, is not enough to establish the existence of such a position.

The tax guarantee, introduced by the ESSOC Law of 10 August 2018 and provided for in particular by Articles L. 80 A and L. 49 of the LPF, nevertheless makes it possible to secure the points actually examined and not adjusted at the end of certain tax audits.

Subject to compliance with the statutory conditions, the taxpayer may thus rely on the assessment made by the tax authorities on those points in any later audit.

Analysing the documents drawn up at the end of a previous audit may therefore reveal guarantees capable of barring new adjustments.

2. Tax rulings: how can a position binding on the tax authorities be obtained?

What is the legal force of a tax ruling?

A tax ruling (rescrit fiscal) allows a taxpayer to ask the tax authorities how the legislation applies to their particular situation, in order to obtain an official position before taking a decision or filing a return.

The general ruling, provided for in Article L. 80 B, 1° of the LPF, may concern, for example, the tax characterisation of an activity, the treatment of a property transaction or the determination of a taxpayer’s tax residence.

Where the statutory conditions are met, a favourable ruling is binding on the tax authorities. They cannot, in principle, make an adjustment on the basis of an assessment different from the one they had previously accepted.

This legal force nevertheless requires the request to have been made in good faith, the facts provided to be accurate and complete, and the taxpayer to comply with the solution adopted by the tax authorities.

The protection is also limited to the facts and tax provisions on which the tax authorities actually ruled. It therefore does not amount to a general validation of the taxpayer’s entire tax situation.

How long do the tax authorities have to respond to a ruling request?

The response time depends on the mechanism used and may have a decisive bearing on the protection obtained.

Under the general ruling, the tax authorities have three months to respond to a written, precise and complete request. However, the expiry of that period does not amount to acceptance: only an express response binds the tax authorities.

Certain specific rulings, by contrast, provide for tacit agreement where the tax authorities do not respond within the time allowed.

The abuse of law ruling, provided for in Article L. 64 B of the LPF, allows in particular a transaction to be submitted to the tax authorities before it is carried out. If the central administration does not respond within six months to a complete request, it may not, subject to the statutory conditions, apply to that transaction the abuse of law procedures provided for in Articles L. 64 and L. 64 A of the LPF.

This guarantee does not, however, mean that all the tax consequences of the transaction are validated. A reassessment based on other provisions remains possible.

The ruling on the absence of a permanent establishment in France, provided for in Article L. 80 B, 6° of the LPF, also offers specific protection to foreign businesses resident in a State that has concluded a tax treaty with France.

Where a business submits a valid and complete request, the tax authorities’ silence for three months amounts to tacit acceptance of the taxpayer’s request.

Other mechanisms make it possible to secure certain transactions relating in particular to the research tax credit, young innovative companies or charitable and public-interest giving (mécénat), under arrangements specific to each.

3. How can the guarantees obtained from the tax authorities be preserved?

Does a favourable ruling protect the taxpayer several years after it is issued?

A favourable position may continue to protect the taxpayer several years after it was issued, provided that the situation remains consistent with the one originally presented and that the applicable tax rules have not changed.

The tax authorities nevertheless retain the possibility of changing their assessment. Where they go back on an individual position, the change may in principle only take effect for the future, once the taxpayer has been informed of it.

By contrast, a legislative amendment rendering the earlier position obsolete may end the guarantee without prior notification.

Likewise, where the taxpayer’s actual situation no longer corresponds to the one presented in their request, the protection may cease to apply.

The challenge is therefore not limited to obtaining a favourable ruling: it also consists in ensuring that the conditions for relying on it continue to be met over the years.

How should you react when the tax authorities refuse to confirm your analysis?

An unfavourable response to a ruling request does not necessarily prevent the taxpayer from pursuing their project. It does, however, require the tax consequences of the transaction and the risks to which they might be exposed to be reassessed.

Article L. 80 CB of the LPF provides, for the rulings within its scope, the possibility of requesting a second review within two months, without introducing any new information.

This review is conducted by a panel and the taxpayer may ask to be heard. The tax authorities respond in accordance with the rules and time limits applicable to the original request.

The involvement of a tax lawyer makes it possible to identify the ruling procedure suited to the planned transaction, to prepare a precisely documented request and to assess the legal scope of the response obtained.

It also makes it possible, where a change of doctrine occurs or a tax audit is initiated, to check whether the guarantees provided for in Articles L. 80 A and L. 80 B of the LPF can usefully be relied on against the proposed adjustments.

Based in Nice, the Valenor firm assists private individuals and businesses in securing their tax transactions, preparing their ruling requests and defending their positions when they are called into question by the tax authorities.

Our objective is to anticipate uncertainty in tax matters, to provide greater tax certainty for the decisions under consideration and to preserve the guarantees on which the taxpayer may rely in any future audit.

Bruno Gherardi
Tax lawyer in Nice - Cabinet Valenor