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4.2. Domestic PE of a Foreign Entity

French domestic law uses the term “enterprises operating in France or abroad” do determine whether or not a business activity is taxable in France. Case law defines this concept as the habitual conduct of business through an autonomous establishment, a dependent agent or a complete commercial cycle. The domestic law concept is not radically different from, but also not identical to the definition of permanent establishments under tax treaties. In this regard, situations might arise whereby a French permanent establishment may be recognized in application of a tax treaty when no such taxable situation would have been recognized under French domestic law in the absence of the treaty. An example of this is given by the 2014 Euro-Car decision of the Supreme Court which held that a UK company does have a permanent establishment in France in application of the France-UK tax treaty even if its French establishment would not have constituted a taxable presence in France under French domestic law (because it did not meet the autonomy test required under domestic law).

The application of a tax treaty by French judges is governed by the subsidiarity principle, according to which a tax treaty cannot itself lead to taxation which is not provided for under domestic law. French judges must first perform an analysis under French domestic law to determine whether any French tax can be levied. Only if the analysis allows for taxation under French law, should the judges apply the tax treaty to examine whether it limits or relieves the tax due under domestic law. However, the French Supreme Court has sometimes decided to directly apply the text of the treaty, without first considering the provisions of the domestic law.      

Many of the tax treaties concluded by France do not substantially differ from the OECD Model Convention which defines a permanent establishment (PE) as a “fixed place of business through which the business of an enterprise is wholly or partly carried on” (Art. 5 of the OECD Model Convention).

The reference to Art. 5 of the OECD Model Convention is, however, of no use regarding French tax treaties which either:

  • Do not define the permanent establishment concept (e.g. France-Saudi Arabia tax treaty of 18 February 1982); or
  • Use other concepts or define the permanent establishment other than under the OECD Model Convention.

The definition provided by the French authorities regarding the permanent establishment concept, as stated in Art. 5 of the OECD Model is similar to the one contained in the OECD commentaries.

The French basic definition of a permanent establishment and the three related tests are as follows:

A Place of Business

Pursuant to French administrative guidelines a “place of business”, translated into French as “business installation”, may exist if premises, equipment, tool sets or a site are put at the disposal of the company. In addition, pursuant to French administrative guidelines, a permanent establishment presupposes the physical presence of employees working for it.

A Fixed Place of Business in Terms of Geographical Location (the location test)

The condition of fixity is a major and determining criterion of the permanent establishment definition. Pursuant to French tax administration guidelines, the installation should be “fixed”, meaning established in a precise location, with a certain degree of permanence and not purely temporary.

A Fixed Place of Business in Terms of the Time that the Place is Used (the duration test)

Installations should be established for a certain period of time. Those which are temporary according to their nature do not constitute a permanent establishment. The main test for this determination is the intention of the taxpayer. If the intention was to implement a permanent business installation, then the installation will be constitutive of a permanent establishment even if the taxpayer ceases its activity or shuts the installation shortly after its implementation due to bad economic results. The installation will, therefore, continue to be considered a permanent establishment until its interruption or move. Conversely, a temporary installation which subsequently becomes fixed or permanent may retroactively constitute a permanent establishment.

In addition, the characteristics of the activities at stake should be taken into account. For instance, a short-term installation can nonetheless be deemed a permanent establishment if the brevity of its existence is due to the specific nature of the activities carried out through it.

Meaning of “Through which the Business of an Enterprise is Wholly or Partly Carried on” (activity test)

Pursuant to the French tax administration guidelines, a business installation may be deemed a permanent establishment if it carries out its own activity, which normally implies the physical presence of local employees. An installation with no activity cannot be deemed to be carrying on a business.

A PE may exist as soon as the company begins to carry out its activity through it, so that the starting date is the date of the beginning of the preparation of the activities. In addition, a permanent establishment may cease to exist with the alienation of the installation or the cessation of its activities, it being understood that a temporary suspension is not deemed to be a cessation of the installation.

It is not necessary that the activity be productive or profitable. Indeed, a company needs to be taken as a whole, with each element contributing to overall income. Conversely, the fact that an installation is productive does not in itself necessary mean that there is a permanent establishment.

The activities carried out must be sufficiently substantial.

It is not necessary that the company be the owner or the tenant of the installation or the equipment used for the purpose of carrying on the business. It is only crucial that the place of business be “put at the disposal “of the company.

Agency PE and French Tax Treaties

Prior to the changes introduced in 2017, the OECD Model provided that a PE arises when an agent acting on behalf of a foreign enterprise habitually exercises authority to conclude contracts in the name of the enterprise, unless the agent acts in the ordinary course of its business and is (legally and economically) independent from the principal. The 2017 changes extended the definition of agency PE to cover situations whereby the agent, whilst formally not concluding contracts, habitually plays the principal role leading to the conclusion of contracts that are subsequently routinely concluded without any substantial changes by the principal.

In a highly publicized 2019 decision, the Court of Appeals upheld a first instance Tribunal ruling and determined that Google Ireland did not have a PE in France in relation to its Adwords services (search-based advertising). The case involved the French tax authority's determination that the French Google subsidiary represented an agency permanent establishment for Google Ireland in France. The Tribunal and the Court held, however, that no agency permanent establishment could be recognized in the circumstances under the France-Ireland tax treaty because the French subsidiary did not have the authority to conclude contracts on behalf of Google Ireland.. The decision of the Court was essentially grounded on the fact that the France-Ireland treaty predates the agency permanent establishment changes and stipulates that a permanent establishment shall be deemed to arise where an agent habitually concludes contracts on behalf of the principal.

The French tax authorities and Google eventually reached a settlement and closed the case before it reached the Supreme Court.

However, the French Supreme Administrative Court had an opportunity to revisit the dependent agent issue in a case it decided on 11 December 2020. The case concerned an Irish principal (Valueclick International, later renamed Conversant International) which concluded online ad contracts with French clients.  The clients were approached, and the contracts were prepared by the principal’s French sister entity (Valueclick France, similarly to Valueclick International held by the US parent), which was remunerated on a cost plus 8% basis. The Court of Appeals held that the Irish principal did not have an agency permanent establishment in France because the French entity did not have the authority to bind it. The Court of Appeals grounded its finding on the fact that contracts with French customers needed to be signed by the Irish principal to become valid. Even if the signature of the contracts by the Irish principal appeared to be very often a mere formality, it meant that Valueclick France did not have the formal authority to bind its principal and, therefore, did not constitute an agency permanent establishment for the principal. The Supreme Court, however, ruled differently. Basing its findings on the OECD Model commentaries as agreed after the conclusion of the France-Ireland treaty, it ruled that the determination of whether an agent “binds” its principal cannot be resolved solely on the basis of the formal authority to sign contracts. In situations where the contracts are substantially “decided” by the French agent and their formal signature by the principal is often a mere routine validation, then the agent does bind the principal and the principal does have an agency permanent establishment in France. The Supreme Court annulled the Court of Appeals ruling and referred the case back for deliberation on the merits based on the principles outlined in its decision.  In a decision of 8 December 2021, the Court of Appeals, after having re-examined the case, ruled that the French agent indeed constituted a French permanent establishment (and also a fixed establishment for VAT purposes) for the Irish principal, given that:

  • The employees of Valueclick France negotiated the terms of the contracts and drafted certain contractual provisions with the clients;
  • The signature of the contracts by the directors of Valueclick International was quasi-automatic and a mere validation of contracts negotiated and decided by the directors and employees of Valueclick France;
  • The employees of Valueclick France developed and monitored the advertising programmes; and
  • The employees of Valueclick France behaved as employees of Valueclick International towards third parties and third parties did not distinguish between both entities.

While the Supreme Court was partly guided in its reasoning by the OECD Model commentaries as approved after the conclusion of the France-Ireland tax treaty, it is premature to conclude from the decision a shift by the Court to a dynamic interpretation approach.