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13.4.1. Main Rules

The main tax law provision is  Art. 57 of the CGI which empowers the Revenue  to adjust the income of a French company which controls or is controlled by a foreign company if the transactions between these companies are not at arm's length. Further, Articles L. 13AA, L. 13AB and L. 13B of the Tax Procedures Code cover the transfer pricing documentation requirements, while Art. L. 80B of the same Code deals with Advance Pricing Agreements (APAs). Finally, Art. 39 CGI defines the notion of related parties. Various Instructions issued by the tax authorities address in detail the interpretation and practical application modalities of the transfer pricing rules.

Definition of Related Parties

The transfer pricing rules address transactions between associated enterprises. Two enterprises are deemed to be associated if (a) one of them participates directly or indirectly in the management, control or capital of the other, or (b) both are held or are under the control of a third enterprise or group of enterprises. The association can be legal or factual.

Legal Control

A French enterprise is deemed to be legally controlled by a non-resident enterprise when the latter directly or indirectly holds either a preponderant part of the capital (in practice more than 50%) or the absolute majority of voting rights in ordinary shareholder assemblies of the French enterprise.  

De Facto Control

De facto control refers to the ability of one enterprise to impose its economic conditions on another enterprise. A French enterprise is deemed to be factually controlled by a non-resident enterprise (or vice versa) when the latter effectively has a real decision-making power over the French enterprise (or vice-versa). This can be the case in the following (non-exhaustive) examples listed in a tax administration guidance:

  • a French enterprise has a contract with a non-resident enterprise which requires to adopt a given price for sold goods;
  • a French and a non-resident enterprise have the same name, use the same agents and share in between them the orders assembled by those agents;
  • a French enterprise manufactures goods in France under a trademark owned by a non-resident enterprise without a license agreement, while the non-resident enterprise buys the entire production of the French enterprise and is involved in the sale and commercialization in France of goods sold to independent third parties.

The Case of Non-Residents Benefitting from Preferential Tax Regimes

Irrespective of whether or not the legal or factual control tests are met, a French resident enterprise is deemed to be associated with a non-resident enterprise for transfer pricing purposes if the non-resident enterprise is established in either (a) a listed non-cooperative jurisdiction (see Sec. 5.5.6.), or (b) a country with a preferential tax regime, being defined as instances where tax due is more than one half lower than the tax that would have been due in France.

The transfer pricing rules are not limited to transactions between separate entities; they also cover transactions with permanent establishments.

Transfer Pricing Method

Any of the five OECD traditional and transactional methods can be used to the extent the method is most appropriate for the determination of an arm’s length price in the circumstances. There is at least formally no hierarchy of methods.

With respect to comparables, there is a preference for French comparables, but foreign comparables - in particular pan-European - are usually accepted.