France Upholds Broad Interpretation of Permanent Establishment

In a recent landmark decision, the French Supreme Administrative Court has ruled that a French company can qualify as a dependent agent, and as such be the permanent establishment of an Irish affiliated company, if it habitually exercises the authority to conclude contracts in the name of that company, even though formal consent to these contracts can only be given by the Irish affiliate. (Conseil d’État, 11 December 2020, n° 420174, Conversant International Ltd).

It is to be noted that the court sat in a plenary formation of all four chambers specialised in tax matters. This is usual when the Conseil d’Etat deals with complex and technical questions of principle.

In general, a permanent establishment means that a foreign enterprise has an office or a fixed place of business in a jurisdiction. However, using the services of a dependent agent can also constitute a permanent establishment.  Under article 2.9(c) of the double tax treaty between France and Ireland, a permanent establishment exists if the agent “has and habitually exercises . . . an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise.”

Valueclick International Ltd (now Conversant International Ltd), is a 100% subsidiary of the US company Valueclick Inc. The company handles ValueClick activities in Africa, Europe, and the Middle East by exploiting the group’s intellectual property rights, managing client relationships, and negotiating and signing contracts

However, the Irish company had an Intercompany Services Agreement with Valueclick France SARL to provide marketing support to identify potential clients and carried out back-office activities, including accounting, cash management, information technology, and personnel services. The fee was calculated at cost plus 8%.

The French tax authorities claimed that the Irish company had a permanent establishment in France for both corporate income tax and VAT purposes because ValueClick France performed functions that exceeded those spelled out in the intercompany services agreement and had “authority to commit” ValueClick International and conclude client agreements on its behalf.

The Paris Administrative Court of Appeal found that the activities of the French company did not exceed those set out in the Intercompany Services Agreement and that ValueClick France did not act as a dependent agent because it lacked authority to conclude contracts for the Irish company.  The court ruled that ValueClick France was not a permanent establishment of the Irish company for corporate income tax purposes. It also ruled that the company did not have a permanent establishment for VAT purposes either because the French company did not have sufficient infrastructure to operate autonomously and it used IT that it used was primarily located in the Netherlands, Sweden, and the United States.

The Conseil d’Etat overturned that decision.

Subsidiaries and affiliated companies cannot in general be considered as a permanent establishment. However, in its case law, the Conseil d’État has found that under certain conditions subsidiaries can qualify as the permanent establishment of an overseas related company (20 June 2003, No. 224407, Interhome AG). This is the case where a French subsidiary is a dependent agent of the overseas company. This requires a legal and economic dependence between both companies.

A permanent establishment may thereafter be characterised as such if the dependent agent has the authority to conclude, or actually concludes, contracts in the name of the overseas company, and only if such contracts relate to the operations of the overseas related company (Conseil d’État, 31 March 2010, No. 304715, Zimmer Ltd.)

A French subsidiary may also be the permanent establishment if the overseas related company operates a business through premises of the subsidiary and, therefore, has a fixed place of business in France. The French courts have been reticent to do so as the French subsidiary usually carried out virtually all the business of the overseas related company, which itself had little or no substance.

Because it is difficult for tax authorities to identify a permanent establishment in such a situation the Multilateral Convention simultaneously amended the definition of permanent establishment in multiple tax treaties. Under Article 12(1) of the Multilateral Convention, a dependent agent will be the permanent establishment of its principal if the agent “habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification” by the principal.


In the Valueclick case, however, the Conseil d’Etat could not use this definition and had to work from the traditional definition of a permanent establishment but brought its interpretation of a dependent agent closer to the new definition of a permanent establishment.

Although the French-Irish double tax treaty had been signed in March 1968, the Conseil d’Etat relied on the OECD commentaries n° 32.1 and n° 33 on article 5 published in 2003 and 2005 and held that a French entity should be considered a dependent agent habitually exercising “the 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.

The court found that “although the Irish company sets the model for contracts concluded with advertisers in order to give them the benefit of the services which it operates, as well as the general pricing conditions, the choice of entering into a contract with an advertiser and all the tasks necessary for conclusion of the contract are the responsibility of the employees of the French company, the Irish company merely validates the contract by a signature which is automatic in nature”.

As for VAT, the Conseil d’Etat considered that the French company had not only the human resources to provide the advertising services independently since they were able to decide to enter into a contract with an advertiser, but also the appropriate technical resources to provide the advertising services since it had access to the appropriate technical resources to enable the Irish company to provide the services autonomously, even though no data centre used to carry out the linking functions is located in France, nor, for that matter, in Ireland.

The Conseil d’Etat deviates from the principles set out by the European Court of Justice that the place of business is the primary point of reference (e.g. for digital services, Welmory, 16 October 2014, No. C-605/12). The French Supreme Administrative Court approximates the qualification of permanent establishments for corporate income tax and VAT, although the applicable rules are different.

This means that the French Tax Authorities would be able to choose how they reassess the tax, either with the French company by increasing its remuneration via the transfer pricing rules, or with the Irish company by characterizing a permanent establishment in France. This should be much of a muchness were it not that the reassessments with the Irish company allows the French authorities to take the position that the Irish company has a concealed activity. That results in an automatic penalty of 80% and a longer statute of limitations.

This case has been referred back to the Paris Administrative Court of Appeal, which will have to apply the principles in the decision of the Conseil d’Etat.


This decision will not have a major impact between jurisdictions that have adopted the new definition of a permanent establishment of the Multilateral Convention to their tax treaty with France (e.g. Ireland).  It will be useful where that definition is not included.

It is noted that this ruling opens a route for the French tax authorities to challenge tax structure such as double Irish with a Dutch sandwich structures, especially when the HR and the material resources of the Irish affiliates are disproportionate to those of the French company.

Multinational groups should make sure that of companies the company that relies on a company ot carry the legal relationship with clients should review their client onboarding and contract formation process. The overseas company should be actively involved in the negotiation and drafting of contracts and it should not just rubber stamp contracts.

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