In a landmark decision of 11 December 2020 involving digital player Conversant (fka Valueclick), the French Supreme Tax Court (Conseil d’État) ruled that a French company can qualify as a dependent agent, and thus as a French permanent establishment, of an Irish affiliate if the French company habitually exercises the authority to conclude contracts in the name of the Irish affiliate, even though formal consent to these contracts can only be given by the Irish affiliate.
This is the first time that the French Supreme Tax Court has ruled on the characterisation of a permanent establishment for a digital player rendering services in France through a non-French entity (Conseil d’État, 11 December 2020, n° 420174, Conversant International Ltd). In doing so, the Court partially overturned the all-or-nothing precedents that the Paris Court of Appeal rendered in a similar and widely publicised tax controversy involving Google Ireland and Google France.
Like the Google case, the Conversant case involves a digital player that structured its French operations through a French subsidiary (Valueclick France) acting as a marketing and promotional services provider for an Irish affiliate (Valueclick Ireland) that entered into transactions with French clients and carried out the business of the Conversant group on the French market.
Unlike in the Google case, however, the legal relationships between the French company and its Irish affiliate, and their respective human and material resources, did not reflect their respective involvement in the transactions carried out on the French market.
Thus, while being a landmark case, this decision also has the hallmarks of a fact-based case.
Grounds for the Tax Assessments
Valueclick is a US group that offers online advertising services such as “marketing affiliation services” or “media services”:
Marketing affiliation services consist of a digital platform that connects advertisers wishing to promote their products with publishers willing to display these advertisements on their site (the publisher receives commission on sales generated by the advertising or information acquired on potential customers). The role of the digital platform, managed by Valueclick, is to act as an intermediary between publisher and advertiser and to calculate the commissions due to the publisher.
Media services consist of carrying out advertising campaigns on behalf of advertisers by buying targeted space on publishers’ websites.
All of these online advertising services are the responsibility of Valueclick Ireland on the global market, except for North America.
For the French market, Valueclick Ireland receives administrative and marketing assistance from Valueclick France. Valueclick France receives compensation for its services on a cost plus 8% basis in accordance with an intragroup services agreement with Valueclick Ireland.
According to the French tax authorities, Valueclick France negotiated the terms of the contracts concluded by Valueclick Ireland with clients and was involved in drafting certain contractual clauses. The French employees also acted as employees of the Irish company, and clients did not distinguish between the Irish and the French company. Therefore, while not formally empowered to do so, Valueclick France was actually concluding online advertising services agreements on behalf of Valueclick Ireland. On this basis, Valueclick France should be viewed as the dependent agent and thus the permanent establishment of Valueclick Ireland. Alternatively, the French tax authorities argued that Valueclick Ireland should be viewed as having a fixed place of business in France through Valueclick France because the services agreement between Valueclick France and Valueclick Ireland was drafted in such broad terms that no distinction was made between Valueclick France’s marketing and promotional services business and Valueclick Ireland’s online advertising business.
For similar reasons, Valueclick France should also be considered as the permanent establishment of Valueclick Ireland for VAT purposes under Article 259 of the French tax code and the VAT directive.
French Supreme Tax Court Opinion
The first point of contention was whether Valueclick France could be viewed as the French permanent establishment of Valueclick Ireland for corporate income tax purposes within the meaning of Article 2 of the France-Ireland tax treaty (which is consistent with the OECD Model Tax Convention).
In this respect, the Paris Court of Appeal had ruled that Valueclick France could not qualify as the permanent establishment of Valueclick Ireland. First, Valueclick France’s services remained in the scope of the services agreement with Valueclick Ireland; therefore, Valueclick Ireland could not be regarded as having access to Valueclick France’s human and material resources to carry out its own business and thus as having a fixed place of business in France. Second, while Valueclick Ireland merely ratified the contracts prepared and negotiated by the employees of Valueclick France, Valueclick France did not exercise the authority to conclude contracts in the name of Valueclick Ireland; therefore, Valueclick Ireland could not be regarded as having a dependent agent in France.
While the French Supreme Tax Court did not assess the merits of the characterisation of a fixed place of business of Valueclick Ireland, it did overrule the decision of the Paris Court of Appeal on the qualification of Valueclick France as a dependent agent of Valueclick Ireland.
Under Article 2(9)(c) of the France-Ireland tax treaty, a dependent agent constitutes the permanent establishment of the principal if that dependent agent has, and habitually exercises, the authority to conclude contracts in the name of the principal.
According to the French Supreme Tax Court, a French company can qualify as the dependent agent and thus as the French permanent establishment of an Irish affiliate within the meaning of Article 2(9)(c) if that French company habitually makes all the necessary preparations and the actual decision to enter into contracts with clients on behalf of the Irish affiliate, which merely ratifies such contracts on a routine basis and is then legally bound by these transactions. This position is consistent with par. 32.1 and 33 of the OECD commentaries on the articles of the model tax convention.
In ruling so, the French Supreme Tax Court departed from the formal, all-or-nothing approach of the Paris Court of Appeal set by its Google precedents, whereby the conclusion of contracts is materialised only by the signature of the parties, and thus the French company could never qualify as the dependent agent of its Irish affiliate as long as only the Irish affiliate could formally sign the contracts. This new approach is processual and looks at who, in practice, makes the decision to conclude the contracts. In this case, the contracts were prepared and negotiated by the French company and routinely ratified without modifications by the Irish affiliate. Therefore, the French company was the one concluding the contracts for purposes of Article 2(9)(c) of the tax treaty.
The second point of contention was whether Valueclick France could be viewed as the French permanent establishment of Valueclick Ireland for VAT purposes within the meaning of Article 259 and the VAT directive.
In this respect, the Paris Court of Appeal had ruled that Valueclick France could not be regarded as having in France the human resources required to autonomously carry out the marketing services because (i) Valueclick France did not have the authority to conclude contracts in the name of Valueclick Ireland, and (ii) the digital platform required to deliver the media and affiliate marketing services was hosted by data centres in the United States, the Netherlands and Sweden.
The French Supreme Tax Court overruled this decision.
Under Article 259 of the French tax code and the VAT directive, a permanent establishment for VAT purposes is characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to provide services or receive services for its own needs.
According to the French Supreme Tax Court, Valueclick France was able to conclude contracts with clients and had access to the digital platform required to perform the services provided under these contracts, even though the data centres hosting this digital platform were located outside France (and outside Ireland). Valueclick France’s employees had regular exchanges with French clients and could also create and set all the parameters of clients’ accounts on the digital platform without any employees of Valueclick Ireland ever intervening. Therefore, Valueclick Ireland could be regarded as having in France the human resources required to autonomously carry out the marketing services, and consequently could be regarded as a French permanent establishment of Valueclick Ireland for VAT purposes. The fact that Valueclick France had more than 50 employees to cover the French market, compared to Valueclick Ireland’s five to seven employees for the entire global market excluding North America, is likely to have weighed significantly in the French Supreme Tax Court’s decision to recognise a French permanent establishment of Valueclick Ireland.
The Permanent Establishment Conundrum
Subsidiaries are legally distinct from foreign related companies and in general cannot be considered as their permanent establishments. However, case law has found that subsidiaries can qualify under certain conditions as the permanent establishment of a foreign related company (Conseil d’État, 20 June 2003, No. 224407, Interhome AG). This bifurcation applies primarily in cases where a French subsidiary is a dependent agent of the foreign related company, requiring a legal and economic dependence between both companies. A permanent establishment may thereafter be so characterised only if the dependent agent has the authority to conclude, or actually concludes, contracts in the name of the foreign related company, and only if such contracts relate to the foreign related company’s operations (Conseil d’État, 31 March 2010, No. 304715, Zimmer Ltd.) A French subsidiary may also be considered as the permanent establishment of a foreign related company if that foreign related company operates a business through its French subsidiary’s premises and thus has a fixed place of business in France. However, French courts have been restrictive in their approach to this matter, as in all cases where a French subsidiary was recognised as the permanent establishment of a foreign related company, the French subsidiary carried out virtually all of the business of the foreign related company, which itself had little or no substance.
Indeed, the difficulty for tax authorities to identify permanent establishments in similar contexts – such as limited risk distributor, commissionaire or marketing office arrangements – led to the adoption of the Multilateral Convention, which simultaneously amended the permanent establishment definition of multiple tax treaties through a cross-election mechanism. Under Article 12(1) of the Multilateral Convention, a dependent agent will be considered as the permanent establishment of its principal if the agent habitually concludes contracts on behalf of the principal or plays the primary role leading to the conclusion of contracts routinely concluded without any material modification by the principal.
In the Conversant case, however, Valueclick France was found to be a permanent establishment of Valueclick Ireland based on a traditional definition of a permanent establishment, not the new definition provided by the Multilateral Convention. Thus, the French Supreme Tax Court brought its interpretation of a dependent agent somewhat closer to the new definition of a permanent establishment. The same reasoning should therefore apply to cases involving companies located in jurisdictions that elected not to include the new definition of a permanent establishment provided by the Multilateral Convention to their tax treaty with France (such as Ireland), or which elected not to apply the Multilateral Convention to their tax treaty with France (such as Switzerland or the United States).
This ruling also shows that tax structures frequently used among digital players (such as double Irish with a Dutch sandwich structures) are no longer impervious to challenge by the French tax authorities, especially when the human and material resources of the Irish affiliates are disproportionate to those of the French company.
Going forward, multinational groups of companies that structured their French operations through a French subsidiary acting as a marketing or promotional services provider for a non-French affiliate carrying the legal relationship with clients should review their structure, especially their client onboarding and contract formation process. In order to mitigate the risk of a French permanent establishment, the non-French affiliate should be involved in the negotiation and drafting of contracts with clients, and its role should not be limited to the signature (or “rubber stamping”) of such contract.
Although the French Supreme Tax Court did not address the issue of the fixed place of business, the French tax authorities raised it, and the opinion of the advocate general points to a potential evolution of case law. Traditionally, if a French subsidiary provides services that remain strictly within the scope of the intercompany services agreement with its non-French affiliate, the French subsidiary should not qualify as a fixed place of business of the non-French affiliate. However, if the intercompany services agreement is drafted in such broad terms that the French subsidiary can in practice carry out all the business of the non-French affiliate, the subsidiary could qualify as a fixed place of business of the non-French affiliate. Therefore, non-French companies should make sure that intercompany services agreement with a French affiliate have a well-defined and limited scope, so that the French company cannot be regarded as carrying out the business of the non-French company.
Finally, this decision raises the question of the portion of the profit that should be allocated to the permanent establishment. In light of the fact that the activities performed on the French market heavily rely on technological tools developed and owned by entities located abroad, this transfer pricing issue remains unanswered.