In two rulings dated February 15, 2023 (Cass. com., February 15, 2023, no. 20-20.599 and Cass. com., February 15, 2023, no. 20-20.600), the Commercial Chamber of the French Supreme Court confirms that the tax authorities can initiate home visits against a taxpayer on the basis of mere suspicion of tax fraud.

The facts behind the dispute: an undeclared establishment in France

The tax authorities suspected a Belgian company of operating a permanent establishment in France and evading tax and accounting obligations, as well as corporate income tax.

In order to gather evidence that the company was carrying on business in France, and therefore subject to French taxation, the tax authorities requested the approval of the “juge des libertés et de la détention” (liberty and custody judge) to carry out home visits, also known as “tax searches”, as provided for under Article L. 225-37 of the French Tax Code.article L. 16 B of the French tax code.

On September 10, 2019, a liberty and detention judge (JLD) authorized the tax authorities to carry out home visits and seizures at premises likely to be occupied by the Belgian company and any other group entity, in order to seek evidence of tax fraud by this company with regard to corporate income tax, sales tax as well as the offenses of purchases or sales without invoices and omissions of accounting entries or the making of inaccurate or fictitious accounting entries.

The home visits and seizures took place on September 11 and 12, 2019.

Authorization for home visits challenged

The Belgian company and, in separate proceedings, the other group companies appealed against the decision of the liberty and custody judge authorizing the tax authorities to carry out home visits and seizures at their premises.

On September 9, 2020, the First President of the Paris Court of Appeal overturned the JLD’s order of September 10, 2019.

In overturning the JLD’s order, he pointed out that the resources allocated to the Belgian company since 2009, namely six to seven full-time staff or five to six employees depending on the period, as well as the presence of a managing director, appeared sufficient for the company to carry out its cash management activities for the Group in Belgium.

As the tax authorities had not demonstrated that the Belgian company did not have the resources necessary to manage its business in Belgium, they ordered the return of the seized documents to the companies.

The tax authorities appealed to the French Supreme Court, arguing in particular that in order to request authorization for home visits, they did not have to prove the existence of tax fraud. She simply had to provide clues that would raise suspicions of misconduct. However, the decision of the First President of the Paris Court of Appeal placed the full burden of proof on her.

Tax searches based on the mere presumption of a permanent establishment in France

In two rulings dated February 15, 2023, LVMH Finance Belgique, no. 20-20.599 and LVHM et autres no. 20-20.600, the Commercial Division of the French Supreme Court (Cour de cassation) overturned the order issued on September 9, 2020 by the First President of the Paris Court of Appeal.

To justify its decision, the Cour de cassation stated that the tax authorities were not required to provide proof of fraud, but only the existence of clues giving rise to suspicion of a breach. It points out thatarticle L. 16 B of the French tax code only requires “presumptions that a taxpayer is evading the assessment or payment of taxes”.

In this case, to obtain authorization to carry out domiciliary visits, the tax authorities simply had to rely on presumptions of the existence of an undeclared permanent establishment in France, and consequently of evaded tax. Accordingly, in asking the tax authorities to prove that the Belgian company could not, in view of its resources abroad, carry on its cash management business in Belgium, the Cour de cassation ruled that the Paris Court of Appeal had added a condition to the law that it did not include. It thus violatedarticle L. 16 B of the French tax code.

The case is therefore referred back to the jurisdiction of the First President of the Paris Court of Appeal, otherwise composed.

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