In a decision dated 11 December 2020 (Valueclick case), previously covered in this blog, the French Administrative Supreme Court (Conseil d’Etat), set the framework, in the context of the digital economy, for the interpretation of the concept of permanent establishment (PE) based on the dependent agent test for the purpose of the French-Irish double tax treaty dated 21 March 1968 and of the concept of fixed establishment (FE) for VAT purposes. 

The Conseil d’Etat overturned the decision dated 1 March 2018 of the Paris Administrative Court of Appeal (the Court) which had rejected the characterization of Valueclick France, a French entity, as a French PE and as a French FE of Valueclick International, an Irish entity, and referred the Valueclick case back to the Court. 

In its decision of 8 December 2021, the Court has now ruled that Valueclick France is to be characterized as a French PE of Valueclick International for corporate income tax (CIT) purposes and a French FE for VAT purposes, but that Valueclick International did not perform a concealed activity, and has consequently excluded the application of the extended statute of limitations and of the 80% penalty for concealed activity.

PE for CIT purposes

PE pursuant to the dependent agent test. In its decision, the Court used the definition of dependent agent as expounded by the Conseil d’Etat for the purposes of the French-Irish double tax treaty, pursuant to which a French entity shall be considered a dependent agent habitually exercising “an authority to conclude contracts” in the name of a foreign entrepreneur if the transactions, even though they are not formally concluded by the French entity in the name of the foreign entrepreneur, are habitually “decided” by the French entity and are merely approved, on a routine basis, by the foreign entrepreneur which is then legally bound by these transactions.

Using this definition, the Court has ruled that Valueclick France is to be characterized as a PE of Valueclick International. In reaching this conclusion, the Court noted in particular that:

• the employees of Valueclick France were negotiating the terms of the contracts and the drafting of certain contractual provisions with the clients;
• the signature of the contracts by the Irish directors was presenting an automatic nature and was rather a mere validation of contracts negotiated and established by the directors and employees of Valueclick France;
• advertising programs were developed and monitored by the employees of Valueclick France; and
• the employees of Valueclick France were behaving towards third parties as if they were employees of Valueclick International, and the clients and the publishers confused the two entities.

Considering this body of evidence, the Court ruled that Valueclick France was a dependent agent of Valueclick International, notwithstanding the fact that Valueclick International set the contract models and general pricing conditions, because “the choice” to conclude contracts with the advertiser and all the diligence necessary for their conclusion were performed by the employees of Valueclick France.

The conclusion reached by the Court in this case may, to a certain extent, be explained by the specific fact pattern of the case given that, according to the opinion of the Advocate General in the Conseil d’Etat decision and an information report presented to the French Parliament in April 2021, the Valueclick case was a “borderline” and “almost caricatural” case, where the French entity was performing almost all the work of the Irish entity. Therefore, the outcome of this case should not necessarily be seen as determinative for cases where the respective roles of the French entity and the foreign entity are much more balanced and where the taxpayer is able to show that the French entity, despite its role in interactions with the clients, does not have actual decision-making autonomy.   

Allocation of profits to the French PE. Having found that there was a French PE, the Court considered that the evidence provided by the taxpayer was insufficient to challenge the profit allocation methodology applied by the French tax authority (FTA), notably in respect of the amount of expenses (leading to a 20% margin) which was determined by the FTA pursuant to a flat-rate method.

The Court dismissed the taxpayer's argument (based on a benchmark analysis) that the 20% margin was excessive when compared to similar taxpayers on the basis that such an analysis cannot be a substitute for the production of evidence, in particular in relation to the activity of the undertaking itself 

The result of this decision could lead to an artificial attribution of profits to the PE and, potentially, to a “juridical” double taxation considering the taxation borne by Valueclick International in Ireland, and to an “economic” double taxation, considering the taxation borne in France by Valueclick France in respect of the remuneration it received as a service provider.

FE for VAT purposes

French FE. Using the framework set by the Conseil d’Etat, the Court ruled that Valueclick France is to be characterized as an FE of Valueclick International for VAT purposes, with a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to provide its services on an autonomous basis. To reach this conclusion, the Court has relied on the following body of evidence:

• Valueclick France had the human resources to provide, on an autonomous basis, the services of Valueclick International. In particular, it had the human resources to make the decision to conclude, with an advertiser, a contract for the services provided by Valueclick International;
• even though the services provided by Valueclick International required technical infrastructure located in datacenters, the creation, configuration and management of the client account by the employees of Valueclick France pursuant to the contract concluded with the advertiser were enough to allow the client to benefit from the agreed services, without restriction and without requiring any specific intervention from Valueclick International  or other group companies; and
• the employees of Valueclick France should be regarded as having the technical resources to provide, on an autonomous basis, the services of Valueclick International, even though the datacenters used for the performance of the services were not located in France

Impact of the application of the reverse-charge mechanism by French customers of the French FE. The Court considered that the French FE could be reassessed for the output VAT for which it should have accounted to the FTA, even where the relevant French VAT had already been self-assessed by its French customers (to the extent they were taxable persons for VAT purposes) under the reverse charge mechanism (indicating that the Court considered evidence of the customers' self-assessment under the reverse charge mechanism irrelevant to the determination of the amount of output VAT for which the French FE should be reassessed).

According to the Court, this result is consistent with VAT neutrality and effectivity principles given that the VAT reassessment did not trigger a double charge to VAT on the same taxpayer. In light of the CJEU case law, this conclusion is, however, highly questionable given that the reassessment combined with the application of the reverse charge leads to a double charge to VAT on the same operation and there is no financial loss to the French State. It is regrettable that the Court did not seek a preliminary ruling from the CJEU. 

The result also contrasts with the approach taken by the Administrative Court of Appeal of Nancy. In a decision dated 6 May 2021 (n° 19NC03651), it allowed a similar VAT reassessment (for a non-digital taxpayer), but this was notably on the basis that the taxpayer had not been able to demonstrate that its taxable clients had self-assessed for the VAT under the reverse charge mechanism (meaning that the Nancy Court had implicitly accepted the relevance of such self-assessment in determining the amount of output VAT for which the supplier could be reassessed).  

Absence of concealed activity 

The finding of a French PE/FE may lead to the application of an extended statute of limitations and to the imposition of penalties, in particular an 80% penalty, if the taxpayer is deemed to have carried out a “concealed” activity in France. According to the case law of the Conseil d’Etat, however, there is no concealed activity if, in light of the fact pattern of the case, the taxpayer is able to demonstrate that it made a mistake when assessing its tax obligations in France.

In the present case, the Court considered that Valueclick International could not be considered to have performed a concealed activity in France and therefore set aside the application of the extended statute of limitations and the 80% penalty for concealed activity. Relying on the Conseil d’Etat case law mentioned above, the Court held that the taxpayer could be considered to have made a mistake, given that the interpretation of the traditional PE/FE concepts in respect of the digital economy has only been clarified after the financial years at issue and, therefore, major uncertainties existed at the time.

This reasoning seems to imply that, for the financial years following the ruling of the Conseil d’Etat of December 2020, it may be more difficult to argue that there was a mistake and that it may be possible to successfully argue this only where the factual circumstances of a case make the application of the framework set by the Conseil d’Etat highly difficult.

What’s next? 

The taxpayer can challenge the ruling of the Court before the Conseil d’Etat. Such an appeal would, as the case may, be provide an opportunity for the Conseil d’Etat to clarify, in the context of this case, the rules governing the allocation of profits to a French PE and the conclusions to be drawn from the VAT neutrality and effectivity principles.