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