A few days after the stress experienced by banks on the markets, another crisis shakes some of them. Searches have taken place this week on suspicion of "CumCum", a controversial practice that could amount to tax fraud.

What is tax fraud?

Tax fraud is of course formally prohibited. Article 1741 of the General Tax Code specifies that any practice aimed at deliberately and illegally evading taxes, in whole or in part, constitutes fraud. It takes many forms. Sometimes, it may be a deliberate underreporting of assets in order to reduce or escape tax, but from time to time, the authorities discover complex schemes being implemented. In particular, they find interpositions of natural or legal persons, existing or fictitious, and often they reside abroad.

However, by abuse of language, many practices, although legal, are described as fraud. Without getting into the moral notions, which are specific to each of us, it is true that the limit is sometimes difficult to identify.

Focus on tax evasion

Tax evasion is the best example. Despite its name, which might suggest otherwise, it is not an illegal practice as such. If it is within the limits set by the law and does not contravene the spirit of the law, the practice is tolerated. Rather, the problem lies in the implementation of techniques to exploit legal loopholes in tax systems.

For example, a citizen who becomes a resident of a country where the tax system is lower than in France will benefit from its lower tax rates, if he or she meets certain criteria. Similarly, a company setting up its head office in a country with favourable provisions for companies respects the law by setting up there. In both cases, this is considered tax evasion but it is legal.

On the other hand, when schemes exploit legal loopholes, tax treaties, exceptional provisions or any other solution in order to minimise the tax due as much as possible, this can be considered as contrary to the spirit of the law. This grey area concerns, for example, the installation of a registered office in a so-called "tax haven" via a post office box. This is the difficult task of the investigators of the General Directorate of Public Finances.

And what about tax optimisation?

For many years, the French state has wanted to mobilise private funds to contribute to the economic health of the country. To do so, it uses the tax lever. Numerous provisions have been introduced over the years. These range from tax reductions for donations to associations to laws relating to real estate investments.

As the state is not able to subsidise or finance all needs, it relies on the citizens. Tax reductions are usually a counterpart to these socially positive investments. The reductions for employment in the home or investments in FIP and FCPI and the Pinel Plus law are examples of solutions put in place by successive governments.

Apart from the moral considerations that sometimes affect the debates, we must be aware that in France we have one of the most complex and important tax systems in the world. Opportunities exist to contribute to the betterment of society while optimising taxation. The support of a professional and trustworthy advisor is essential. Wealth A7, a wealth management firm for over 15 years, can accompany and advise you, contact us!

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