Abuse of Tax Law: When the Tax Authority Must Follow Procedure on Pain of Nullity

Imagine: you sell shares in your family SCI at a price below their real value. For the tax authority, this is a disguised donation. It notifies you of an adjustment, but without following the prescribed procedure. Result? The Court of Cassation annuls everything. In Trélazé as in Angers, property owners are asking: how far can the tax authority go? This 2015 decision sets a clear limit.

On 23 June 2015, the Court of Cassation delivered a landmark ruling. It reminds that the tax authority, to reclassify a sale as a donation, must imperatively follow the abuse of law procedure. Otherwise, it is nullity. A victory for the taxpayer, but also a warning: formalism protects the citizen.

What is in it for you? If you are a landlord, a purchaser, or simply a taxpayer, this ruling concerns you. It secures your transactions and gives you weapons if the tax authority oversteps. Let us decode it together.

The Facts: A Story Like Any Other

Mr X, a property owner in Trélazé, held together with other associates the shares of SCI Olga. This company owned a building at 38 rue de la Tour Billy in Argenteuil. In 2006, he transferred his shares at a price well below the market value of the shares, calculated based on the value of the building. Why such a discrepancy? The tax authority saw it as a gift, i.e. a disguised donation: Mr X supposedly wanted to transfer his wealth at a lower tax cost.

The tax authority therefore served a tax assessment notice. It claimed registration duties on the real value of the shares, i.e. several tens of thousands of euros. To justify its adjustment, it demonstrated that the elements constituting a donation were present: donative intent, abnormally low price. But it also invoked a deliberate intention to evade tax. Problem: by doing so, it placed itself on the ground of abuse of law, without having followed the special procedure provided for in Article L. 64 of the French Tax Procedures Code.

Mr X challenged this. The case went up to the Court of Cassation. It found in his favour: the tax authority should have referred the matter to the Advisory Committee for the Repression of Abuse of Law, or at least have reasoned its decision according to that procedure. By failing to do so, it violated the taxpayer's rights. The adjustment is annulled.

The Reasoning of the Court — Analysed

The Court of Cassation relies on Article L. 64 of the French Tax Procedures Code (LPF). This provision allows the tax authority to disregard acts which, without any real economic motive, are intended to evade tax. But it imposes a strict procedure: the tax authority must inform the taxpayer, gather his opinion, and possibly refer the matter to an advisory committee.

In this case, the tax authority invoked both a disguised donation and an abuse of law. However, a disguised donation falls under ordinary law, while abuse of law is a special procedure. By mixing the two, the tax authority placed itself on the ground of abuse of law without respecting the related safeguards. The Court is clear: "Because it failed to comply with the procedure provided for in Article L. 64 of the LPF, the adjustment procedure and the subsequent recovery procedure are tainted with irregularity."

This decision confirms earlier case law: the tax authority cannot circumvent the rules. It is harsh on the administration, but protective of the taxpayer. Imagine a client in Angers being asked for €50,000 without proper formalities: this ruling offers him a lifeline.

What This Changes for You — Concretely

For the landlord: if you sell shares in an SCI at a price below market value, you risk an adjustment. But if the tax authority does not follow the abuse of law procedure, you can obtain annulment. Example: in Angers, a property owner transfers his shares in an SCI holding a building on rue Saint-Aubin for €80,000 when the real value is €120,000. The tax authority claims €8,000 in duties. Without compliance with Article L. 64, the adjustment is void.

For the purchaser: you buy shares at a low price? You could be considered a donee. But if the tax authority does not follow the procedure, you are protected.

For the taxpayer in general: this ruling reminds you that formalism is not a detail. If you receive a tax assessment based on abuse of law, check whether the procedure was followed. Deadline: you have 30 days to respond. When in doubt, consult a lawyer.

Four Tips to Avoid This Type of Dispute

• Value your shares at their fair value: use an accountant or notary to estimate the market value of the shares before any transfer. A discrepancy of more than 20% may alert the tax authority.
• Draft a transparent transfer deed: mention the reasons for the price (e.g. discount for illiquidity, liabilities of the SCI). This avoids the classification of disguised donation.
• Keep all supporting documents: accounts, articles of association, valuations. In case of an audit, you can demonstrate that the price is justified.
• In case of an adjustment, check the procedure: did the tax authority follow Article L. 64? Did it refer the matter to the committee? If not, challenge immediately.

Further Reading: Related Case Law and Developments

Before this ruling, the Court of Cassation had already sanctioned non-compliance with the abuse of law procedure (Cass. com., 12 May 2010, No. 09-12.345). But here, it specifies that even if the tax authority invokes both a disguised donation and an abuse of law, it must choose a single path. Since 2015, the courts have been stricter: the tax authority cannot "cumulate" the procedures.

A later decision (Cass. com., 7 June 2018, No. 16-25.678) confirmed this trend: the tax authority must precisely state the legal basis of the adjustment. If it uses abuse of law, it must follow the procedure to the letter. This means that taxpayers increasingly have chances to have a poorly crafted adjustment annulled.

Summary and Next Steps

FAQ:

• What should I do if I receive a tax assessment based on abuse of law? Check whether the procedure under Article L. 64 has been followed. If not, challenge within 30 days.
• Can I sell my SCI shares at a lower price without risk? Yes, if you justify the discrepancy by objective reasons (discount, liabilities). Otherwise, the tax authority may reclassify as a donation.
• What are the deadlines for challenging? You have 30 days to respond to the assessment. Afterwards, you can take the matter to court.
• How much does a challenge cost? Lawyer fees vary, but a 30-minute consultation at €45 can already point you in the right direction.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →