The Administrative Court of Appeal of Paris (la Cour administrative d’appel de Paris) on 25 April 2019 issued a decision affirming a 2017 judgment of the lower tax court (Paris) that an Irish entity of a multinational corporation did not have a permanent establishment in France because of the activities of a French related entity.
Read an April 2019 release (French) from the appeals court that describes the appellate court’s decision.
Between 2005 and 2010, the French entity provided digital marketing advice and assistance to the Irish entity regarding its French sales under the terms of a marketing and services agreement.
In 2011, the French tax authorities conducted a “tax raid” of the French entity’s offices, and based on information seized, the tax authorities took the position that the Irish entity actually performed services for French customers from a permanent establishment (PE) in France.
The lower tax court in Paris—following a line of established legal analysis of the concepts of “permanent establishment” and of the authority “to commit”—held in 2017 that while the French entity had acted as a dependent agent, it did not have the authority to commit the Irish entity. The lower court found that while all contracts were approved by the Irish entity, the contract validation process was a mere formality and the contracts were not concluded in France. The two conditions (dependence and authority to commit) necessary for finding a permanent establishment were missing; thus, the court concluded that the Irish entity did not have a permanent establishment in France. Read TaxNewsFlash
The court of appeals in April 2019 affirmed that the Irish entity did not have a permanent establishment in France and, in reaching this conclusion, addressed the two conditions or elements for finding a permanent establishment in France.
Based on these elements, the appeals court held that the French entity did not have the status as an independent agent.
According to the court of appeals, the French tax authorities failed to prove that the French entity had the authority to commit the Irish entity in a commercial relationship. According to the appeals court:
The appeals court also considered that the Irish entity did not have a fixed place of business in France to serve as its premises, and the staff of the French entity was at its sole disposal for the French entity’s own activity.
In conclusion, the appeals court concluded that the French entity did not constitute a permanent establishment of the Irish entity in France.
Tax professionals in France believe that the French tax authorities might seek to bring the case before the Conseil d’Etat (the French Supreme Administrative Court), but that in any event, the appeals court decision highlights how the definition of a permanent establishment (under income tax treaties drafted in a “pre-BEPS world”) is difficult to apply to digital activities in France, given that the French courts have been following a strict legal analysis.
The definition of permanent establishment pursuant to the France-Ireland income tax treaty is in the taxpayer’s favor in this case. However, the new definition of a permanent establishment under Article 12 of the multilateral instrument (MLI) in accordance with BEPS Action 7, reflects a broader definition of a “dependent agent” in affiliated company situations. This broader definition would entered in force through the MLI and in turn could lead to a different conclusion in similar cases in the future, provided the applicable income tax treaty is affected by the MLI ratification.
Lastly, this appeals court decision could have political implications, given that it was released a few weeks before the discussions in the Sénat (upper house of the French Parliament) on draft legislation related to the tax on digital services—read TaxNewsFlash—and also a few weeks before the G20 summit at which negotiations on the “significant digital presence” are expected.
For more information, contact a tax professional with KPMG Avocats, a KPMG member firm in France:
Marie-Pierre Hôo | + 33 (0) 1 55 68 49 09 | firstname.lastname@example.org
Patrick Seroin | + 33 (0) 1 55 68 48 02 | email@example.com
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.