France: France Expanding Tax Permanent Establishment Definition, Overturning Previous Case Law

In Short

The Situation: In December 2020, the French administrative supreme court issued a major decision expanding the permanent establishment ("PE") concept and criteria for both French corporate income tax ("CIT") and value-added tax ("VAT") purposes. 

The Result: A PE may exist in France if an agent is entitled to negotiate the details and make important decisions with respect to the conclusion of contracts on behalf of a foreign operator, even if such contracts are formally executed outside of France.

Looking Ahead: Greater scrutiny needs to be paid to any operations in France that could trigger a PE for tax purposes, especially when some of the relevant services are of a digital nature. More generally, adjustments may be necessary within international groups which structured their French presence around the more traditional and formalistic PE approach.

The French administrative supreme court ("Conseil d'Etat") has overruled the Paris administrative court of appeals and issued a ground-breaking decision on the concept of PE for both French CIT and VAT purposes. 

The matter involved an Irish company and a French company, both affiliated with the Conversant (formerly known as Valueclick) group. The Irish company provided digital marketing services to its clients and the French affiliate provided, inter alia, marketing assistance, management, back-office, and administrative services to the Irish company. The French tax authorities took the view that the French company, by participating in the contractual process with the French clients, had to be viewed as a PE of the Irish company for French tax purposes. 

The issue was not clear-cut under applicable law. At the international level, it echoed the many discussions regarding taxation of the digital economy, in particular within the OECD. At the French level, the Conversant case was a good opportunity for the Conseil d'Etat  to review the reasoning of several recent decisions issued by administrative courts of appeals, generally in favor of the taxpayers and grounded on the traditional PE principles (in particular the much-publicized Google matter, which was settled although the administrative court of appeals had ruled in favor of the taxpayer).

The decision and, more importantly, the reasoning of the Conseil d'Etat  was eagerly awaited by many international groups with French operations, as the PE concept (as interpreted under French domestic law and double tax treaties entered into by France) is one of the main backbones to determine taxable basis for French CIT and VAT purposes.

With respect to CIT, the Conseil d'Etat ruled that the Irish company had a PE in France because the French company was a dependent agent of the Irish Company. The main reason given for the conclusion was that the French company could choose to conclude contracts with the Irish company's clients, notwithstanding the fact that the contracts were formally executed by the Irish company. The Conseil d'Etat  found that the relevant criterion is not "who formally executes the contract," but rather "who negotiates the details and decides which contracts should be executed."

The main issue at stake has been left out by the Conseil d'Etat for now: the income to be allocated to the French PE. The case will now go back to the administrative court of appeal to rule on this.

With respect to VAT, the Conseil d'Etat also ruled that the Irish company had a PE in France, despite the fact that the IT networks required to provide the services were not located in France (nor in Ireland). The mere fact that what was done by the French employees could grant access to the services provided by the Irish company was sufficient to characterize a PE in France. 

This new case law will probably make it easier for the French tax authorities to assert a PE in France whenever they find that a sufficient portion of the relevant services, activities, or value chain is effectively located in France, be it through digital means or otherwise.

Three Key Takeaways

1. The French tax supreme court has expanded the PE definition with respect to digital marketing services provided by an Irish company to its French clients with the help of a French affiliate. 

2. This ruling may make it easier for the French tax authorities to characterize PEs in France for both CIT and VAT purposes. 

3. An important issue remains the applicable income allocation rules, to be decided by the administrative court of appeals. 

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