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5.5.4. Treatment of Internal Dealings and Transfers

Dealings between a business in France (i.e. PE) and the general enterprise (i.e. head office) are generally not treated for tax purposes as genuine transactions subject to the arm’s length principle. The tax authorities consider that services or commodities provided by the head office or the PE must be booked at cost and may not include an element of profit, unless the internal dealings are related to the main activity carried out by the enterprise (e.g. sales of inventory, provision of services). Moreover, certain dealings are fully disregarded due to the absence of legal separation of the PE from the general enterprise of which it is a part. This is particularly true for interest and royalty payments, which are usually not deductible (or taxable) when paid (or received) by a French PE (CAA Paris, 28 May 1991, No. 2918, Weston Hyde Products ltd). Except for banks, cash transfers from the foreign head office to the French PE are disregarded and, thus, not taxable.

Any transfer of assets between the foreign head office and the business in France gives rise to a gain or a loss for tax purposes, which must occur at arm’s length. Practically, it is the transfer of the asset from the PE’s balance sheet to the head office which triggers the tax liability, i.e. separate entity approach. The tax will be based on a notional capital gain.

The after-tax income of a French permanent establishment of non-resident companies is deemed to be remitted to the head office. This income deemed remitted is subject to a 30% branch remittance tax  (see Secs. 4.4. and 8.2.).