A French company, LifeStand Vivre Debout (“LSVD” or the “Company”), was in the business of designing, manufacturing and marketing wheelchairs for disabled persons.  It granted to a Swiss company, LifeStand International SA (“LSI”), the exclusive right to distribute its products in certain countries.

Further to a tax audit, the French tax administration (the “FTA”) considered that, pursuant to Article 57 of the French Tax Code (“FTC”), most of the amounts paid by LSVD to LSI, pursuant to the distribution agreement, constituted a transfer of profits to the Swiss company.  Accordingly, the FTA increased the Company’s taxable profit and applied a withholding tax on the deemed dividends.

The Lyons Administrative Court, and then the Lyons Administrative Court of Appeal, ruled in the FTA’ favor.  The Company then brought its case before the French Administrative Supreme Court.  Its main arguments were that the FTA had no basis for finding that a sole economic dependency was sufficient to demonstrate a dependent relationship within the meaning of Article 57 of the FTC and that the FTA did not prove that the price paid for the relevant services was excessive.

The French Administrative Supreme Court overturned the Administrative Court of Appeal’s decision because the latter did not check whether the FTA had demonstrated the existence of a transfer of profits.  Indeed, Article 57 of the FTC requires the FTA to demonstrate two elements in order to prove that an indirect transfer of profits occurred:

  1. Does a de jure or de facto dependent relationship between the parties to the transaction exist?[1]

The French Administrative Supreme Court ruled that the FTA had demonstrated the existence of a de facto dependent relationship by notably pointing out the following elements: 

  • LSI was established in Switzerland at a domiciliation address and no rent related to commercial premises was booked in its accounting for fiscal year 2004;  
  • LSVD continued to perform most of the functions entrusted to LSI, and LSVD retained control over the production of documents related to LSI’s promotional activities and to the development of its website; and  
  • LSVD’s manager performed the de facto management and control over LSI.
  1. Existence of a transfer of profits?

The French Administrative Supreme Court ruled that the Court of Appeal had not correctly checked whether the FTA established the existence of a transfer of profits to the extent that: 

  • the Court of Appeal did not consider whether the commission rate could be viewed as normal and did not determine that there was no compensation for LSI’s involvement;  
  • the Court of Appeal did not consider whether the FTA had established that LSVD had paid an excessive price for the relevant services.

In this decision, in keeping with its consistent case law, the French Administrative Supreme Court confirms that it strictly assesses whether the conditions characterizing an indirect transfer of profits have been met.  We will have to monitor the analysis by the Lyons Administrative Court of Appeal, on remand, with respect to the condition as to whether a transfer of profits exists.