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France: No permanent establishment found of Irish entity

France: No permanent establishment found, Irish entity

An administrative court in Paris—in a proceeding initiated when the French tax authorities alleged “tax evasion”—determined that an Irish entity did not have a permanent establishment in France for purposes of either corporate income tax or value added tax (VAT).


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The case identifying information is: TA Paris, n°1505178, 1505165, 1505113, 1505126, 1505147 (12 July 2017)


In 2011, the French tax authorities conducted a “tax raid” at the premises of a multinational entity’s office in France. With the information collected, the French tax authorities issued a reassessment notice against the Irish entity of the multinational group on the grounds that the Irish entity had a permanent establishment in France both for corporate income tax and for VAT purposes.

The additional tax assessed along with the penalties imposed at a rate of 80% exceeded a tax assessment of €1.15 billion. The taxpayer sought judicial review of the assessment. 

Court’s decision

The Paris administrative court in its July 2017 action dismissed the analysis of the French tax authorities, and held that the Irish entity did not have a permanent establishment in France. While all contracts were approved by the Irish entity, and despite the fact that the validation action was "a mere formality," the contracts were not concluded in France, the court found.

Following the line of legal analysis in the Zimmer case (CE, n° 304715, 308525 (31 March 2010)), French courts continue to adhere to a strictly legal analysis of the concept of “permanent establishment” and of the authority “to commit.” The findings of the Paris administrative court include the following (an unofficial English translation):

… although the Audit Department asserts that the advertising agreements in question are “negotiated” then “concluded in substance” by the employees of [the French entity], the investigation does not show, contrary to the administration’s allegations, that the effective onlining of the advertisements occurred, for any of the agreements concerning the period in question, before its final validation by [the Irish entity]; this validation, should it merely be a purely formal verification, evidenced by an electronic countersignature, of the orders recorded by the employees of [the French entity], conditions at law the effectiveness of the agreement subscribed by the advertiser, it thus being irrelevant for the administration to allege that [the Irish entity] is necessarily and systematically bound by the agreement resulting from the discussions between advertisers and employees of [the French entity]; lastly, the Audit Department cannot usefully claim that the employees in question “determine with the customers the price of the advertising service (…) sold,” insofar as the cost of the subscribed advertisement depends…on an automated auction system and the number of clicks on the proposed promotional link, the effective onlining of the advertisement being the last factor to determine the amount of any billing of the service to the customer…


The judges thus followed a strict interpretation of the terms of the tax treaty signed between France and Ireland (again, an unofficial English translation):

Whereas, based on the foregoing, if [the French entity] had the status of a dependent agent within the meaning of § 9 c) of Article 2 of the abovementioned French-Irish tax treaty, it cannot, however, be regarded as having held, with respect to the years in dispute, the power to commit [the Irish entity] in a commercial relationship relating to the operations constituting the specific activities of this company; it follows that the Audit Department wrongly considered that [the Irish entity] was performing, via the permanent establishment allegedly existing in the form of [the French entity], an activity in France within the meaning of § 9 c) of Article 2 of the abovementioned French-Irish tax treaty”.

KPMG observation

Tax professionals with Fidal* have noted that the French tax authorities advocated strongly for BEPS Action 7 in order to adopt the new permanent establishment definition that appears in Article 12 of the multilateral instrument (MLI). The French tax authorities have used this “future” definition of permanent establishment in their current tax audits to characterize permanent establishments.

The court implicitly recalled that existing law (i.e., tax treaty provisions) must be modified in order to implement this new concept for the future. The rapporteur in this case basically reached the same conclusion—that existing law cannot allow for the taxation of the multinational entity’s profit results in France and that it would be necessary to amend the definition of a permanent establishment in order to accomplish what the tax authorities desired. 

The decision of the administrative court of Paris also raises questions about the effectiveness of the position of the French tax authorities—adopting a radical attitude and refusing any negotiations could cause them to lose all of their arguments. Under current analysis, the existence of a permanent establishment necessarily results in an "all or nothing" situation, whereas negotiations in other countries have allowed foreign tax authorities to recover substantial amounts of tax. 

The French tax authorities have issued reassessment notices to other taxpayers—reassessments that total in the billions of euros over the last five years—using an argument of the existence of a permanent establishment in factual situations that are similar to that presented in the present case. The amounts of the reassessments and the refusal of successive Finance Ministers to negotiate a settlement have given rise to a risk that the courts may reject the reassessments. Negotiations with the tax authorities could have allowed for some of the reassessments to be upheld.

What’s next?

The decision of the administrative court of Paris (a first-level court) has already been appealed by the tax authorities. Some believe that there could be added political pressure as the case is appealed to the highest court. 


For more information, contact a tax professional with Fidal* in France:

Laurence Mazevet | +33 1 55 68 15 35 |

* Fidal is a French law firm that is independent from KPMG and its member firms.

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