The allocation of the foreign company’s income to the French permanent establishment require that the latter keeps separate and autonomous accounts in line with the French standards, i.e. book income and balance sheet. Some assets of the foreign company, must, thus, be allocated to the French business, in accordance with a factual and functional analysis, similar to the method recommended by the OECD.
Once allocated to the French business, these assets must be registered in the French accounts. Expenses incurred directly by the business in France (e.g. deductions, depreciation and amortization) are deductible under the standard rules. General expenses incurred outside France by the head office (e.g. executive and general administrative expenses, financing expenses, expenses related to the creation or acquisition of intangibles), but for the purpose of the business in France, are also deductible insofar as the taxpayer is able to duly justify such allocation (CAA Paris, 16 April 1998, No. 961435, Sté d’informatique européenne).
In the absence of separate accounts providing sufficient reliability, an apportionment of the non-resident company’s total income is necessary to determine the part of the income taxable in France. This notional allocation of the income must be as precise as possible. Two methods may apply, depending on the circumstances:
- A proportional allocation in respect of a ratio based on key elements of the company (e.g. expenses, turnover, invested capital, premises, volume of stocks); or
- An allocation by comparison with an independent enterprise, in particular where the business conducted in France is of auxiliary or preparatory nature.