Legal background: Pursuant to Article 57 of the French Tax Code, profits unduly transferred abroad by a company to other related companies shall be added back into its taxable income.
Scheme in place: French Company A buys raw materials and unfinished goods from several suppliers to manufacture and commercialize goods. Further to a restructuring, Company A is converted to a toll manufacturer, with a foreign related party Company B delivering the raw materials and unfinished goods to which it retains title for processing by Company A.
The FTA observes that the remuneration and the taxable result of Company A are heavily reduced and that those of Company B increased. Company B benefits from a favorable tax regime: e.g. exemption or low taxation rate. The reduction of Company A's taxable result is not commensurate with the risks and functions transferred to Company B. Furthermore, the physical flows of raw materials and other products remain identical further to the restructuring: only the invoicing circuit has been modified.
Outcome of audit: A substantial part of Company A's result initially taxed in France was transferred to Company B, which benefits from a more favorable tax rate. The FTA performed an analysis of the functions and risks of Company A before and after the restructuring. The FTA examined thoroughly the nature of the activity of Company B (means, personnel, …). If an abnormal transfer of profits is characterized, the FTA will adjust the taxable results of Company A by the profits given up through the restructuring. The FTA will also look for a possible compensation that should have been paid by Company B to Company A for the restructuring.