France: Revised approach to determining permanent establishment; income tax and VAT consequences

France: Revised approach to determining PE

The French high administrative court (“Conseil d’Etat”) issued a decision that addresses the French concept of permanent establishment—both for corporate income tax and value added tax (VAT) purposes—and that revises what previously had been a traditional approach to the characterization of a permanent establishment.


The case is: ValueClick International Ltd. (11 December 2020).

KPMG observation

Tax professionals believe that this decision also could have unexpected consequences for taxation of the digital economy.


The decision of the Conseil d’Etat in the ValueClick case revises the court’s traditional position on the characterization of a permanent establishment, as expressed in its 2010 decision (Société Zimmer Ltd (CE, March 31, 2010, n° 304714)).

The Conseil d’Etat in the Zimmer case—applying a strict legal analysis of the commissionaire’s authority under the contract—took the position that a dependent agent must have the authority to legally bind its principal vis à vis the customers.

Applying this position, the Paris Court of Appeal held in that insofar as the services could not be rendered before there was formal approval by the foreign principal (for instance, an Irish company) and even though it was established that the contract validation was merely a routine process, the French company did not have the authority to legally bind the foreign principal. ValueClick International Ltd. (CAA PARIS, 1 March 2018, 17PA01538) and Google Ireland Ltd (CAA PARIS, 25 April 2019, 17PA03068)

In the instant appeal from the Paris court, the Conseil d’Etat reversed the decision of the Paris appellate court and decided that the France-Ireland income tax treaty (1968) must be interpreted in light of the §32.1 and 33 of OECD commentary (2003 and 2005). This commentary generally provides that a dependent agent soliciting and receiving orders (which are then routinely approved by the principal), as well as a person authorized to negotiate in a country, all the details of a contract (which is then signed by the principal in the other country) can constitute a permanent establishment. This OECD commentary was viewed as persuasive authority by the Conseil d’Etat.

The Conseil d’Etat also expanded its position in another of its notable decisions—SA Andritz (CE, Sect., 30 December 2003, n° 233894). In that decision, the high court held it was not possible to invoke the OECD commentaries with regard to interpreting income tax treaties if the commentaries were issued by the OECD after the subject tax treaty was signed.

KPMG observation

It has been observed that this effective reversal of long-standing case law is somewhat political, as shown by the opinion’s lengthy discussion about the nature of taxation of digital multinational entities and about tax optimization.

Taxpayers will need to determine if the new interpretation is intended to be used as an anti-abuse instrument, allowing the tax authorities to target “extreme situations.” For instance, it was observed in conclusions by the rapporteur public of the Conseil d’Etat that the Irish entity only employed between five and seven people to cover the market for Europe / Middle East / Africa (EMA) whereas the French entity employed 50 persons. Query whether this could result in a completely different concept similar to the one proposed by article 12 of the OECD’s Multilateral Instrument (MLI).

VAT implications

The Conseil d’Etat also decided that the entity in the ValueClick case had a permanent establishment for VAT purposes and thereby connected the presence of a permanent establishment for VAT purposes to the existence of a permanent establishment for corporate income tax purposes. Thus, the Conseil d’Etat fully reviewed the criteria for the recognition of a permanent establishment for VAT purposes.

With regard to the "rationality test” which helps in determining the place where the supplier is located, the Conseil d’Etat questioned the primacy of the head office vis-à-vis the place of the permanent establishment when the fact pattern allows consideration of where the permanent establishment could also render the services (whatever the functions and roles of the head office).

With regards to the condition of autonomy, the Court of Justice for the European Union (CJEU) expressed on several occasions that it was necessary for the establishment to have enough technical and human resources to provide a service. These two elements were necessary to recognize the existence of a permanent establishment for VAT.

The Conseil d’Etat specified in its decision that the fact of not having technical means did not preclude the recognition of a permanent establishment, insofar as this condition was not relevant for companies in the digital sector (because they basically can locate their technical means wherever they want). In addition, the decision considers that the French employees had enough contractual power to reach decisions regarding the conclusion of contracts.

KPMG observation

As noted above, the unexpected results of the decision regarding the French concept of permanent establishment, both for corporate income tax and VAT purposes, may mean taxpayers need to take a new look at their strategies in pending matters and cases in France when the existence of a permanent establishment is at stake.

For more information, contact a tax professional with KPMG Avocats in France:

Marie-Pierre Hôo | + 33 (0) 1 55 68 49 09 |

Laurence Mazevet | + 33 (0) 1 55 68 49 67 |

Laurent Chetcuti | +33 (0) 1 55 68 48 87 |

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