Le Cour de cassation confirms that the use of a simple offshore company domiciled at a firm of accountants in Cyprus to carry out  a commercial activity in France, to avoid French taxation without the appropriate accounting documentation  in place , can be a criminal offence, and the 1 year sentence of imprisonment inflicted upon the French dirigeant de fait (not exactly the same as a shadow director), would have been upheld were the actions to have been committed during a time when the offences were constitutional. In this particular  case, they were not.

The judgement hinged upon whether a" dirigeant de fait" can be subject to the offence of criminal tax fraud in lieu of a company which he controls.

In effect,  the offshore company concerned was not shown to have the necessary resources, whether human or business structure, to carry out the business operations of import export and customs and operations management in question from abroad. its  French "dirigeant de fait", who had not put in place any form of mandate as an independent agent, and was therefore at risk of a form of fraud, and omission to keep proper accounting records of his real activity, as the deemed "dirigeant de fait".  He also had a Cypriot credit card issued against the Company's bank account there.

Cour de Cassation Chambre Criminelle, 5 juin, 2013, 12-83334

The Company LVA Exportises whose registered office was in Cyprus in the offices of a firm of accountants, Constandinou carried out the essential part if not the whole of its activity of purchase and resale of cosmetic products purchased abroad and destined for resale on the international market, principally European from Villeneuve-Loubet and not from Cyprus, where it had simply obtained a domiciliation with Constandinou who advertised itself as a firm specialising in the registration and administration of offshore companies.

There have been CJEU decisions that have upheld the domiciliation of a company within the United Kingdom with its effective place of business in Denmark as not being an abus de droit or a fraud. However this argument was not raised by the defendant, an individual, as the Company was not represented at the level of the Cour de cassation, not it appears at the lower courts. The manner in whhg the procedure was accarried out, as directed againstthe dirigeant de fait, who was on the facts unquestionably such, and could therefore be charged alongside the company.

What is of interest is that the French corporate tax system is a territorial one, and therefore there must either have been a clause in the French-Cyprus tax treaty which extended the scope of corporate taxation to include these transactions, or from the perspective of the non treaty rules, the error was made of not ensuring that the complete business cycles concerned was carried out entirely and exclusively outside France. The Cour de Cassation deployed article 209 CGI, which meant that it had already decided that the corporate seat for tax purposes was already in France under the siège réel concept.

These points were indirectly addressed by the Cour de Cassation in the following manner:

Its reasoning is based on the premise in France  that it is the place of the day to day administration of the Company's business, not its centralised management and control, which dictates its residence.

A common mistake made by foreigners, who also fails to take into account the fact that the tax residence of a company in Britain could also be influenced by that factor.

"The documents invoked to evidence that the official directors of the Company intervened in its administration, the management and the undertaking of expenses are inoperant, and must be considered as being only a fraudulent legal dressing up [the term fraude is not used in its criminal sense, but in the meaning of a sham or fraud on a power]; in particular, the purchase, resale and the management of stocks and their customs processing were carried out from the French establishment which had the technical business capacity to do so (Computer systems, telephone, lines, fax), and which received significant business correspondence, the address being situated at[ ......] being known to its business customers [partners] as being that of the company in France; as it was a purchase and resale activity of cosmetic products from abroad, and destined for the international market, principally European, it is not contestable that all the economic activity of the company was not restricted to the French territory, but it is also incontestable that the import-export activity was managed from France, and it was in this country that the seat of effective direction was situated; in addition, no pertinent evidence has been shown to the Court that this company had fulfilled its fiscal obligations abroad, and in particular in Cyprus; The Company LVA Exportises has to be considered as liable to taxation in France, as much by virtue of article  209 of the code général des impôts as by the Tax Treaty cited above...."

The Court then went on to analyse the effect of this situation, and maintained all but one of the judgements in the courts below.

However, as the law defining the offence had been declared unconstitutional by the Cour Constitutionnel, and the facts alleged against the French dirigeant de fait, were therefore not an offence at the time they were committed, he was exonerated, from his one year prison sentence for fiscal fraude and omission to keep accounting records.

The individual concerned, a certain M. Jean-Marc X...... had not signed any form of independent agency agreement with the company to enable him to carry out the activity from Nice in France independently from the Cypriot company, and had omitted to keep appropriate accounting records on the basis required by the fiscal situation of the company in France.

The full judgement in French can be found on the resources page at Cour de Cassation Chambre Criminelle, 5 juin, 2013, 12-83334 http://www.overseaschambers.com/media/17231/cour%20de%20cassation%20chambre%20criminelle,%205%20juin,%202013,%2012-83334.pdf