In 2019, a French Digital Services Tax (DST) was enacted in order to subject to a 3% tax two categories of services provided in France: digital intermediation services and targeted advertising services.

The DST law notably provides for a certain number of exemptions, such as the exemption for services mainly consisting in the provision of digital content and for intragroup services, and an exclusion from the DST base of sums paid as consideration for goods or services which, within the meaning of provisions applicable for VAT, are economically independent from the access and the use of the taxable service.

As customary in France, the French tax authorities (FTA) have issued administrative guidelines (the DST Guidelines) in relation to these provisions. In a decision dated 31 March 2022, the French Administrative Supreme Court held that certain provisions of the DST Guidelines incorrectly interpreted the DST law and were therefore illegal.

The decision is of particular interest for two reasons: first, it gives an insight into how certain provisions of DST law should be interpreted and, secondly, it highlights the advantages of the procedure allowing taxpayers to challenge, directly before the French Administrative Supreme Court, the legality of administrative guidelines.

Legality of the challenged DST Guidelines at stake

The decision of the French Administrative Supreme Court serves as a reminder that the FTA are bound by the law and cannot adopt an interpretation adverse to the taxpayer which would be contrary to the law. The decision illustrates this principle in particular in respect of the following three provisions.

• Exemption of taxable services provided within a group. The Court considered that the DST Guidelines commenting on the intragroup exemption interpreted the DST law incorrectly by subjecting this exclusion to the condition that the relevant intragroup services are not also provided to third parties. According to the Court, these guidelines added a new and illegal condition to the law, which shall be read as allowing the application of the exemption to intragroup services even if the taxpayer also provides the same services to third parties.
• Digital content exemption applicable to multiplayer online games. According to the Court, the statement in the DST Guidelines that multiplayer online games could not, as a matter of principle, benefit from the digital content exemption provided for in the DST law was an incorrect interpretation of that law. Such types of games – even though their principal purpose is to allow interactions between players – may be considered as providing digital content and therefore benefit from the digital exemption. Consequently, the DST Guidelines were illegal in this respect.
• Economically independent transactions applicable to logistic services provided by the operator of a marketplace. The Court held that the DST Guidelines interpreted the DST law incorrectly by stating that services providing additional or improved functionalities or commercial advantages in the use of a digital interface (such as logistical services provided to sellers by the operator of a marketplace on an optional and non-exclusive basis allowing them to benefit from commercial advantages) cannot be regarded as independent from the access or use of the interface. According to the Court, these guidelines were indeed too indiscriminate as the mere existence of a joint promotional offer cannot characterized, in itself, the existence of a dependent transaction which would have to be included in the DST base.

Benefit of challenging the administrative guidelines before the French Administrative Supreme Court

In France, administrative guidelines constitute a very valuable insight into how the FTA will interpret and apply legal provisions. As a matter of principle, these guidelines are binding on the FTA which cannot reassess taxpayers if they apply the interpretation provided for by the guidelines in their tax returns.

These guidelines are, however, never binding on the taxpayer who is always able to claim, if the interpretation provided by the guidelines is not favourable to their position, that the guidelines are contrary to the relevant legal provision. To this end, two routes of challenge – which may be combined – are available to the taxpayer.

• The taxpayer may challenge the legality of the administrative guidelines in the context of discussions with the FTA on their particular tax position. Except in the case where the FTA agree not to follow the administrative guidelines (which is in practice extremely rare), the discussions will generally end up before the tax judge who will have to determine how the law shall apply to the specific situation of the taxpayer. Given the three levels of jurisdiction in France (first instance court, appeal court and Supreme Court), a definitive solution may not be obtained for several years (approx. 6-8 years).
• The taxpayers may, in certain circumstances, be able to challenge the legality of the administrative guidelines directly before the French Administrative Supreme Court in the context of an objective recourse (recours pour excès de pouvoir), which is precisely what has been used by the taxpayer in the present case.

In the "recours pour excès de pouvoir" procedure, the French Administrative Supreme Court does not consider the specific position of the taxpayer but only assesses – generally within a year from the introductory brief  – whether the administrative guidelines correctly interpret the law. Although the specific case of the taxpayer will not be dealt with by the Supreme Court decision, this procedure is very interesting as it allows the taxpayer to ascertain - very rapidly - the position of the Administrative Supreme Court on the administrative guidelines at stake. Subject to the wording of the decision, the assessment of the legality of the administrative guidelines by the Administrative Supreme Court will generally give valuable insights into how the Supreme Court interprets the law.

The taxpayer will be able to rely on the Supreme Court’s decision in the context of any ongoing discussions with the FTA on their specific tax position (and, in case of a decision favourable to the taxpayer, the FTA would no longer be able to rely on the illegal administrative guidelines to justify their position), and before the tax judge, who will in practice, take into account the decision of the French Administrative Supreme Court when interpreting and applying the law to the taxpayer.