French landmark decision fighting against “commissionaire” arrangements in the digital economy
The “permanent establishment” is a crucial tax standard for the States to determine where an activity can be taxable, between the State where it is carried out and the State where the person carrying it out is resident. It has two main definitions, one being the “fixed place of business” and is related to a minimum physical presence, and the “dependent agent” where a person has the authority to conclude contracts for the entity resident of another State.
Regarding the “dependent agent” definition, the French Supreme Administrative Court traditionally considered that a commissionaire acting in its own name but on behalf of its foreign resident principal does not constitute a permanent establishment due to civil law, the leading decision being the Zimmer case, 2010. This position has been followed by other civil law countries, leaving a place for international groups to structure their presence in such civil law jurisdictions with commissionaire arrangements, thereby avoiding a tax basis there.
This position has been criticized not only because it did not allow to fight against artificial commissionaire arrangements, but also due to the flaws in its reasoning. As a consequence, the multilateral instrument (MLI) initially signed by 76 countries and territories (including France) in 2017 provides under article 12 a clause fighting more efficiently against “artificial avoidance of permanent establishment status through commissionaire arrangements and similar strategies”.
France did not issue any reservation for this provision, thereby accepting its inclusion in the tax treaties it concluded. However, this is not the case for other countries such as Ireland which made a reservation to this article. Consequently, even though the tax treaty concluded between France and Ireland on March 21, 1968, is covered by the MLI, article 12 has not been included in its definition of permanent establishment (article 2(9) of the tax treaty). International groups could then have thought that “the old ways”, i.e. using Irish-based companies to provide digital services in France with commissionaire arrangements there, could be maintained!
That is not what has decided the French Administrative Supreme Court in its decision of December 11, 2020 (n° 420174) “Conversant International Ltd”. In this case, an Irish company was 100% held by a US company operating in the digital marketing area, especially in Europe. Under a service agreement concluded between the Irish company and a French subsidiary, the latter was acting as marketing representant of the Irish company, including identification and prospection of potential customers, back-office services, management, and administrative services, in consideration for remuneration of “cost +8%”. The template of customer contracts and the general financial terms remained determined by the Irish company.
Referring to 2003 and 2005 OECD comments (5(32.1) and 5(33)), the Supreme Court says that a French subsidiary can qualify as a dependent agent where it habitually exercises a power of decision on transactions eventually but routinely approved by the Irish holding company, even if they are not formally concluded: “in the name” of the Irish company.
The direct impact is that, with or without the MLI, the commissionaire arrangements are vigorously undermined in France. Many practitioners may recall the similar structure that has notably been used by Google and given rise to outstanding decisions of French lower courts in favor of the taxpayer, before having been subject to a settlement with the French tax authorities.
More globally, the Supreme Court seems to unilaterally extend the MLI provisions to tax treaties which should not be covered by the MLI due to a political decision of the Contracting States. The Supreme Court already gave another example of such an approach. In a recent case, it has decided to interpret the Belgian-French tax treaty of 1964 as amended in a very flexible way in view of allowing taxation in France of capital gains from the alienation of shares by a resident of Belgium because the company derives its value principally from immovable property in France, while the tax treaty does not include such provision and is not covered by Article 9 of the MLI related to “real estate” shares (CE February 24, 2020, n° 436392).
The enforceability of the MLI in France seems to have a bright future, even for the tax treaties (or certain provisions of them) that are not covered due to a political decision of either France or the other Contracting States. Close attention must therefore be brought to other anti-abuse rules (hybrid mismatches, dividend transfer transactions, avoidance of permanent establishment by splitting-up contracts or artificial application of activity exemptions, etc.).
It is also worth noting that the French Supreme Administrative Court ruled in the same case that the circumstances also allowed the qualification of permanent establishment for VAT purposes, confirming therefore the reassessment made by the French tax authorities.
International groups are therefore strongly recommended to review their commissionaire arrangements in the future, if any, and to manage their risk for the past, bearing in mind that statutes of limitations in France are generally extended up to 10 years in such matters. Permanent establishment cases can also entail tax fines of 80% and even criminal penalties, as the vast majority of them must now automatically be transferred to the prosecutor.