An important decision on the characterization of a permanent establishment in France has been rendered by the French Supreme Administrative Court (Conseil d’Etat) in the Conversant International Ltd case (CE, 11 December 2020, n° 420174).
Ruling on referral, the Paris Administrative Court of Appeal applied the analysis given by the Conseil d’Etat and emphasized that it resulted from the instruction that:
- the staff of the company Valueclick France negotiated the terms of contracts and the drafting of certain clauses with the customers,
- the signature affixed to the contracts by the Irish managers was automatic and was much like a simple validation of the contracts negotiated and drawn up by the managers and employees of the company Valueclick France.
- the staff of the French company behaved towards third parties as acting as employees of the Irish company, creating in the minds of customers and publishers, confusion between the two companies.
- the choice to enter into a contract with an advertiser and all the tasks necessary for its conclusion was left to the employees of the French company, the Irish company limiting itself to validating the contract by a signatory which was automatic.
In addition, the Court ruled on two major questions arising from the recognition of a permanent establishment a posteriori: that relating to the taxable profits in France to be allocated to the permanent establishment thus characterized and that relating to the demonstration of a concealed activity leading to a lengthy statute of limitations and heavy penalties (fiscal and potentially criminal).
On the first related question, the Court considered that in the absence of accounts, and of any evidence to the contrary, the Administration could assess, through the collections noted, the revenue that the permanent establishment could have achieved in France if it had set up a separate company. A flat-rate method for determining the costs of the permanent establishment was applied by the Administration. Evidence to the contrary has not been produced by the company as part of the direct assessment procedure. The latter was undoubtedly convinced of its right to the existence of a permanent establishment and apparently did not develop a subsidiary argument on the determination of taxable profit, to its great detriment.
On the second related issue, the Irish company had, in essence, not fulfilled its reporting obligations in France and was not known to a business formality center. These elements characterize, in principle, the practice of a heavily sanctioned concealed activity since the right of recovery by the Tax Administration is then exercised over ten (10) years and a fine of 80% is incurred, in addition to interest on late payments. However, in the case in point, the Court held that it was only after the taxation years in dispute that the case law adapted the traditional notion of permanent establishment to the digital economy. The Irish company could therefore legitimately believe that at the material time, and in the state of the substantive law then applicable, it did not have a taxable permanent establishment in France. It could not therefore be held to have intentionally concealed its existence.
The Conversant case therefore leads foreign companies carrying out part of their activity in France to be extra vigilant about their modus operandi and, if necessary, to regularize their situation.
