In its decision in the Valueclick Case on 11 December 2020, the French Administrative Supreme Court ruled on the existence of a permanent establishment based on the dependent agent test within the meaning of Article 2 of the French-Irish double tax treaty signed in March 1968 (the French-Irish Treaty). The question pertained to the assessment of whether or not a French entity had, and habitually exercised in France, an authority to conclude contracts in the name of an Irish entity belonging to its group and whether or not it was therefore acting in France as a dependent agent of the Irish entity, an analysis that the Paris Administrative Appeal Court had rejected.
The Paris Administrative Appeal Court indeed considered that the French entity did not have the authority to conclude contracts in the name of the Irish entity, notably on the ground that even though the employees of the French entity were involved in the preparation, negotiation and implementation of the contracts between the Irish entity and its clients, these contracts (including any deviation from the general terms of sale predetermined by the Irish entity) could not legally bind the Irish entity without its prior approval and signature, irrespective of the fact that this approval was “purely formal”.
The French Administrative Supreme Court overturned this ruling. It considered that a French entity had to be regarded as exercising an authority to conclude contracts in the name of an Irish entity (even though it did not formally conclude contracts in the Irish entity’s name), if the French entity habitually decided transactions which the Irish company merely ratifies and which, once ratified, are binding upon the Irish company.
To support this broad “substance over form” interpretation of the permanent establishment concept (discussed in more detail in a previous post), the French Administrative Supreme Court expressly referred to the OECD commentaries (C(5) n° 32.1 and n° 33) respectively published in 2003 and 2005 - i.e., after the adoption of the French-Irish Treaty which was signed in March 1968.
The use of subsequent OECD commentaries: the confirmation of a trend more than a “revolution”
As a preliminary remark, it is interesting to note that, in its opinion provided to the French Administrative Supreme Court, the rapporteur public (to a certain extent equivalent to the Advocate General in the EU) performed a comparative analysis on how the question of the use of subsequent OECD commentaries is addressed in other OECD countries. Such an approach is not new and shows the will of the French Administrative Supreme Court, especially for new questions of law, to consider the solutions applicable abroad before taking its own decision, which is all the more understandable for international tax matters as in the case at hand.
By explicitly referring to OECD commentaries published after the adoption of the French-Irish Treaty, this decision raises the question of its consistency with the decision dated 30 December 2003 (n° 233894, SA Andritz) in which the French Administrative Supreme Court expressly established the principle that OECD commentaries published after the adoption of the relevant provisions of a double tax treaty could not be used when interpreting and applying these provisions.
According to scholars and judges, the principle set forth in the 2003 decision was, however, not absolute and did not prevent tax courts from giving subsequent OECD commentaries a “persuasive” or “comforting” value, especially in respect of the provisions defining permanent establishments. In other words, although subsequent OECD commentaries cannot be used when they extend the scope of the relevant treaty provision as initially agreed by the contracting states (which was, according to the conclusions of the rapporteur public on the 2003 decision, the justification of the 2003 decision), they may be used when they merely clarify the original meaning of the treaty provision without expanding its scope (to the extent, of course, that these subsequent OECD commentaries do not relate to a subsequently amended version of the relevant treaty article).
Given the wording used by the 2020 decision (“as it can furthermore be seen from paragraphs 32.1 and 33 of the [OECD commentaries]”), the French Administrative Supreme Court clearly followed this approach, as the subsequent OECD commentaries seem to have been used only to support – as persuasive elements – its own interpretation of the concept of “authority to conclude” contracts within the meaning of the French-Irish Treaty. In the case at hand, it means that the French Administrative Supreme Court implicitly considered that the concept of authority to conclude contracts, as initially agreed by the contracting parties and subsequently confirmed by the above-mentioned OECD commentaries, had to be construed as covering cases where the foreign principal’s signature and approval of the transaction decided and negotiated by the French agent are only a formality and carried out on a routine basis.
This decision shall therefore not be construed as introducing a new and absolute exception to the principle set forth by the 2003 decision, but merely as confirming, for the first time explicitly, the potential persuasive nature of subsequent OECD commentaries. This solution is understandable as it would be odd to exclude, as a matter of principle, subsequent OECD commentaries, irrespective of their content.
A new era of uncertainty, or of opportunity, for taxpayers?
However, determining, on a case-by-case basis, when subsequent OECD commentaries merely clarify a treaty provision or, on the contrary, modify it, will not be easy in practice. This “case by case” approach, therefore, inevitably creates some uncertainty for the taxpayer, but it may also create some opportunities when the subsequent OECD commentaries provide an interpretation more favourable than the one proposed by the tax authorities.