When governments cheat and don't respect their own rules

The example of France

Note : This article is the 8th in a series on over-legislating a a path that more and more nation-states are taking in an attempt to emasculate the disruptions that threaten them.
Here is the first 7 articles in the series :

1. Death by regulation

2. When Regulations are So Stupid...

3. Is the EU killing itself with regulations?

4. GDPR : its real cost to the EU - Data Protection or Economic Destruction?

5. Will Nation-States Game The System with Cartels ?

6. A Nation of Law-Breakers: The Unseen Strategy of Inflated Legislation

7. When states are so desperate that they make intelligence illegal

This is one of the ways in which nation-states will react to the disruptions threatening them: with highly acrobatic interpretations of their own laws, and even cheating by not respecting them. And yes, it happened, and not just once.

For example, in 2015, the Court of Justice of the European Union (CJEU) inflicted a slap in the face on France, ruling that it could not demand social security contributions on the income from the assets of people not living on its soil, and therefore not affiliated to the Social Security system, paving the way for the repayment of hundreds of millions of euros in unduly collected levies.

How did we get here?

François Hollande and his socialist government

In 2012, the newly elected parliament of François Hollande's Socialist government decided that the French property income of non-residents would be subject to the CSG and CRDS, created in the 1990s on a “temporary” basis, to help plug the growing social security deficit (as usual, they were neither temporary nor sufficient to plug the social security hole).

Under domestic law, this compulsory levy is considered a tax (i.e., it is paid without creating a counterpart for the State), but has all the characteristics of a social contribution (payment of which must result in entitlement to social benefits in return).

This distinction may seem minor, but the problem is that European law stipulates that it is not possible for a resident of the European Union to be subject to the social security system of more than one Member State, as this would hinder the free movement of people, one of the four fundamental freedoms of the Union¹ .

The French government tried to hack the system by calling the levy a tax rather than a contribution, but it didn't work: the Court of Justice examined the actual characteristics of the levy, rather than simply its label.

So here we have an example of a government losing in court for what looks very much like an abuse of rights!

One month after this decision, 12,367 claims had already been lodged by aggrieved taxpayers, for a total of 180 million euros, including interest of 4.80% per annum which the State had to pay² .

Lessons learned by the French government (or not)

Faced with this clear judicial defeat, did the French government hasten to acknowledge its error and bring itself into line?

Not so. Unaccustomed to being told what to do, and motivated by tax receipts of around 320 million euros a year, it once again tried to hack the system, reallocating these receipts to another body, in the hope of once again making the CGS-CRDS look like a real tax³ .

Unfortunately! Two years later, another legal defeat: the Strasbourg Administrative Court ruled that the link with the Social Security budget was still clear, and that the contributions were therefore social contributions within the meaning of European law.

This decision was upheld on appeal a year later, paving the way once again for the reimbursement of hundreds of millions of euros in unduly collected contributions⁴ .

One of the ways in which governments disrupted by the Internet will choose to reinterpret their rules to suit themselves

This case is rich in lessons, as it presents several characteristics that I believe are destined to become trends:

• A growing willingness on the part of governments to seek tax revenues wherever possible, including abroad, motivated in large part by an increasingly desperate financial situation.

• An ever-increasing willingness to interpret laws, treaties, regulations and constitutional provisions in their favor, even twisting them so far from their original meaning that it will be clear to many experts that this is, at best, a haphazard interpretation, and at worst, a corruption of fundamental constitutional principles.

• A growing loss of power vis-à-vis supranational bodies, as we saw in “The Worst Moment: The Growing Difficulty Of Nation-States To Raise Taxes”.

• And, finally, a loss of prestige and legitimacy for your government: if it allows itself to cheat by "abusing the law" (using the letter of the law to divert its spirit to its own advantage), while asking you to be honest and respect the spirit of the law as well as its letter, how does that make you feel? Does it encourage you to respect the law and its spirit?

Other examples

And this isn't the first time that France has been rapped on the knuckles for failing to comply with European Union regulations - something it has sworn to do! Judge for yourself:

• 2015 : The CJEU condemned France for taxing 5% of dividends paid by a European subsidiary to its French parent company as corporation tax, a practice deemed contrary to the freedom of establishment guaranteed by European law, as it differs from the tax treatment of similar transactions within an integrated tax group in France, where they are fully exempt⁵ .

• 2017 : The CJEU ruled that another French 3% tax on distributed dividends was contrary to European Union law, costing it €2 billion in annual revenue, and paving the way for the repayment of around €10 billion wrongly collected⁶, more than the entire tax authority had managed to recover following its tax audits in 2016⁷ (!). The worst part of the story is that this tax had been introduced in 2012 to compensate for another levy previously censured by the CJEU⁸ .

An example from yours truly

Companies selling training courses are, under certain conditions, exempt from VAT in France⁹ .

Given the principle of free movement of goods and services within the European Union, this exemption must be granted to any European company, according to the same criteria.

I therefore tried to obtain this exemption for my Estonian company¹⁰, motivated both intrinsically by the VAT reduction it would bring, and extrinsically by the concrete field research it would enable me to carry out to enrich the book I’m writing (from which this Substack offers extracts).

To do this, I called on the services of a specialist law firm, who were with me every step of the way and told me that the process would be fairly quick and would involve two stages: 1) applying for a company identification (SIRET) number¹¹ and 2) applying to the authorities for VAT exemption.

Was it quick and efficient?

Given the series in which this story is set, you're probably guessing... not really.

Here's a quick summary of what happened:

• May 2022: we sign the contract and the lawyers begin the process of applying for the SIRET.

• End of July 2022: after gathering all the necessary information, the firm sends the SIRET number application to the authorities. The firm specifies that the average processing time is two months.

• At the end of November 2022: a little behind schedule, the tax authorities responded to what should have been a simple formality... in the negative. Our lawyer is moved: "We contested the incomprehensible decision of the tax authorities to refuse the company's registration", and adds "it would appear that the reason was a technical incomprehension. [...] we [drew] the attention of the tax authorities to the fact that this refusal to register [...] does not comply with current law, and in particular EU law".

  • It also states (italics mine) "If the Administration maintains its position, the only possibility of recourse would be to file a contentious claim with the Non-Residents' Tax Department. This solution would be costly and particularly time-consuming."

  • So here we see a possible tactic of an administration that doesn't want to follow the law: refusing something that shouldn't be refused, counting on the fact that recourse would be long and costly. Fortunately, this has to be an honest mistake, doesn't it? There's obviously no way that the administration of a country as prestigious and law-abiding as France could do something like this, is there? Let's take a look.

  • The lawyer did send a protest to the department concerned, indicating that its decision was not in line with the law, and told me that "there is no guarantee that we will get a response to this request for a new assessment of the situation, and a fortiori a favorable response, insofar as it is the same department that has to study this request".

• December 2022: following his advice, I decided to launch two procedures:

  • File a contentious claim with the administrative court. We must first make a hierarchical appeal, to which the administration has two months to respond. In the event of refusal or non-response, we can then take the matter to the administrative court.

  • "Request the Government, through a question by a Member of Parliament, to clarify French administrative rules" on the subject.

  • All this, of course, at an additional cost: 1,800 and 1,200 euros respectively, for a total of 3,000 euros.

• March 2023: the lawyer confirms that the administration has not responded, thus opening the way for an appeal to the administrative court. I confirmed my intention to pursue this course of action, at a new cost of 1,700 euros.

  • Total cost of this administrative extension to date: 4,700 euros.

• June 2023: my lawyer informs me that she has just "received a call from Mr. Olivier B. of the Legal Affairs Department who handled our summons and who admits that the refusal to register was an error on their part. He will proceed with the registration request with his department." She added: "I hope to finally receive this registration so that I can transfer it to you."

  • All's well that ends well, right? But given what you've read so far, you probably suspect that it's not quite that simple.

• September 2023: new email from my lawyer: "The tax authorities have contacted us again to ask the company to appoint a VAT representative, for no legal reason. We are in discussion with them, but this situation is unjustifiable."

  • More than a year after an application for registration that was supposed to be a simple formality, the administration has found a new illegal trick to play for time.

  • My lawyer suggests that I try another route, that of registering with the INPI, which is a recent possibility. I agree.

  • I then ask him if there is any recourse against this new blatant abuse by the administration.

• October 2023: the lawyer still hasn't replied on this last point. I think she's getting bored and thinks it's impossible to fight the administration. I call her again.

• November 2023: she still hasn't replied on this point. Wearily, I ask her about the status of the request to the government via a member of parliament. Answer: "I had suspended my reminders following the administration's response, which indicated that it was putting an end to the matter. My requests, in particular to MP Christelle Dintorni, have gone unanswered. I'm personally going to meet a member of parliament at his office next week.

• End of November 2023: the administration sends a "statement of defence", which reiterates its initial position. My lawyer tells me: "The administration has drawn conclusions (with no legal basis), to which we do not recommend replying, in order to obtain a hearing date as quickly as possible (in about 6 months). All these steps have been cumulative in order to hope for a favorable and "rapid" outcome."

  • In short, we're going round in circles.

• April 2024, as I write this series: almost two years after starting the procedure, we still haven't made any progress. The administration is playing for time.

So, is the French administration making an error in good faith, or is it deliberately dragging the matter out, because it has decided that the law doesn't apply to my case? I leave it to you to decide.

Coming soon

In the next article, we're going to conclude this series on how nation-states will try to resist the disruptions that threaten them through regulation.

Then, given all that has been shared since the beginning of this blog, we'll explore how you can make the most of this new world.

Stay tuned ! In the meantime, feel free to follow Disruptive Horizons on Twitter and Linkedin, and join the tribe of Intelligent Rebels by subscribing to the newsletter : 

And here are the first 7 articles of this series :

Death by Regulation

When Regulations are So Stupid...

Is the EU killing itself with regulations?

GDPR : its real cost to the EU - Data Protection or Economic Destruction?

Will Nation-States Game The System with Cartels ?

A Nation of Law-Breakers: The Unseen Strategy of Inflated Legislation

1. Sébastien Pilard, "Le projet de loi sur la CSG des non-résidents risque de coûter cher aux contribuables," Le Figaro, 2015

2. Frédérique Perrotin, "Affaire de Ruyter: dernier acte?", Actu juridique, 2019.

3. Ingrid Feuerstein, "CSG : la parade de Bercy pour taxer les non-résidents", Les Echos, 2015

4. Ditto, see footnote 3

5. Cyrille Pluyette, "Dividend taxation: Europe condemns France", Le Figaro, 2015

6. Gaël Vaillant, "Taxe sur les dividendes annulée: qui va payer?", Le Journal du Dimanche, 2017.

7. 8.61 billion euros in taxes recovered in 2016, Isabelle Couet, "Impôts: les contrôles fiscaux ont fait entrer 11 milliards dans les caisses de l'État en 2021", Les Echos

8. Mathieu Castagnet, "La justice européenne censure la taxe sur les dividendes", La Croix, 2017. The levy annulled was the withholding tax on income paid to non-resident undertakings for collective investment in transferable securities (UCITS).

9. Particularly if they are registered as a training organization.

10. Estonia has an e-residency program designed for digital nomads like me, which we'll talk about in Part 2.

11. A French registration number for the company.