By Mickael Duquenne, Senior Manager & Pascal Luquet, Partner, Grant Thornton Société d’Avocats, Paris
In a landmark decision handed down in a plenary session on December 11, France’s Supreme Administrative Court ruled that Valueclick International, an Irish company operating in the digital economy sector, had a permanent establishment in France and was therefore subject to French corporate income tax.
Multinational enterprises operating in France through commissionaire or agent-like arrangements should carefully review their organization in light of this important decision.
Valueclick
The Conseil d’Etat was called upon to rule on France’s taxation of Irish company Valueclick International, engaged in online advertising. The court clarified the notion of permanent establishment based on the applicable double tax treaty with Ireland and the EU VAT directive.
Valueclick International, a wholly-owned Irish subsidiary of a US company, carried on business in France through an affiliated company with which it had entered into an intra-group services contract.
Pursuant to this agreement, the French company provided the Irish company with marketing services for the distribution in France of the group’s various products, together with administrative and back-office services inter alia, in return for payment.
France permanent establishment
For a permanent establishment to exist in France under Article 2, 9-c of the Franco-Irish tax treaty, an Ireland resident company must either have a fixed place of business in France through which it carries on all or part of its activity or have recourse to a dependent agent which habitually exercises in France powers enabling it to execute a commercial relationship.
The Conseil d’Etat reasoned that, under the treaty, a French company must be regarded as exercising dependent agent powers even if it does not formally conclude contracts in an Irish company’s name if it habitually enters into transactions that the Irish company merely endorses without substantial modification.
Such an interpretation is consistent with paragraphs 32,1 and 33 of the commentaries to the OECD Model Convention issued on January 28, 2003, and July 15, 2005, respectively, the court said.
It is important to note that France’s highest administrative court thus applied provisions aiming to prevent the artificial avoidance of permanent establishment status through commissionaire arrangements even though France and Ireland did not add these Multilateral Instrument provisions to the applicable tax treaty.
It is important to note that France’s highest administrative court thus applied provisions aiming to prevent the artificial avoidance of permanent establishment status through commissionaire arrangements even though France and Ireland did not add these Multilateral Instrument provisions to the applicable tax treaty.
Following this reasoning, the court concluded that Valueclick International had a permanent establishment in France. The court noted that while Valueclick International set the model for contracts with advertisers and the general pricing conditions, the French company was responsible for deciding whether to enter into a contract with an advertiser or not and performed all tasks necessary for its conclusion.
Valueclick International merely validated the contract by a signature, which was automatic in nature, the court observed.
In ruling that Valueclick International had a permanent establishment in France through its affiliated company established in France, the Conseil d’Etat considered that the latter had the human resources that made it possible to provide the Irish company’s services. In particular, it had the human resources that enabled it to decide to conclude a contract with an advertiser that would allow it to benefit from the Irish company’s services.
The High Court also concluded that the French company employees had the appropriate technical resources to independently provide the Irish company’s services, even though no data center was located in Ireland or France to perform linking functions.
In so ruling, the court reversed for error of law and legal characterization the decision of the Paris Administrative Court of Appeal (CAA Paris 1-3-2018 No. 17PA01538: RJF 6/18 No. 600).
The lower court had ruled that there was no French permanent establishment on the grounds that the Irish company signed the contracts with French clients.
Through this landmark case, the Conseil d’Etat departs from its historical, exclusively legally driven analysis to favor a substance-over-form approach.
VAT
With respect to VAT on the French company’s provision of services to Valueclick, the characterization of a permanent establishment in France is based on Article 259 of the French tax code, which transposes the EU VAT directive.
While the years in dispute in the present case run from 2008 to 2012, the rules of territoriality for B to B services substantially changed as of 2010, resulting in a shift of the place of supply, which determines the State in which VAT is due, from the supplier to the customer.
In accordance with European Court of Justice case law, for the years 2008 and 2009, the place of supply of services is the place of the supplier’s establishment.
The place of the registered office of the supplier is the priority connecting point. Another establishment available to the provider in France and from which the services are provided is considered if the connection to the head office does not lead to a rational solution from a tax point of view or creates a conflict with another Member State.
Derogation from the priority criterion of the head office as the permanent establishment is permitted if the establishment has a sufficient permanence and a structure capable, from the point of view of human and technical equipment, of making the services in question possible in an autonomous manner.
The connection of the supplies of services to the French supplier or Ireland head office determines, for that period, whether the VAT on those supplies was due in France or Ireland.
The court concluded that VAT was due in France from 2010–2012 when the place of supply of services was France because the services were provided to a taxable customer established in France within the meaning of Article 259.
To determine the VAT taxpayer from 2010 onwards, if the services can be connected to a permanent establishment, there is no need to determine whether this connection is fiscally more rational than a connection to the provider’s place of business, the Conseil d’Etat said.
— Mickael Duquenne is Senior Manager at Grant Thornton Société d’Avocats, Paris.
—Pascal Luquet is Partner at Grant Thornton Société d’Avocats, Paris.
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