France Expanding Tax Permanent Establishment Definition, Overturning Previous Case Law

• Published date: 07 April 2021
• Subject Matter: Tax, Income Tax, Sales Taxes: VAT, GST, Tax Authorities
• Law Firm: Jones Day
• Author: Mr Nicolas André, Lodewijk Berger, Emmanuel De La Rochethulon, Edward T. Kennedy and Niv Tadmore

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...