(Versailles Administrative Court of Appeal, Jul. 8, 2014, no. 11VE01187, Sté Carrefour SA)

In a decision dated July 8, 2014, the Versailles Administrative Court of Appeal reiterated the requirement for the tax authorities to use relevant comparables to prove, pursuant to Section 57 of the French tax Code, the existence of profit transfers abroad.

Indeed, the tax authorities had adjusted the taxable earnings of Carrefour SA, the group’s holding company, which did not receive any trademark royalties from its foreign subsidiaries as consideration for the use of its trademark-brand.

In its ruling, the Versailles Administrative Court of Appeal first pointed out that, to make such adjustments, the tax authorities had to prove that the French company did not apply arm’s length remuneration, which normally applies between independent companies in similar circumstances:

(…) when it notes that prices billed by a company established in France to a related foreign company are lower than prices charged by a similar and normally operated companies, i.e., at arm’s length, the tax authorities must be regarded as proving the existence of an advantage that it has the right to reintegrate into the French company’s earnings, unless the French company proves that it provided at least equivalent consideration for such advantage.

In this particular case, although the tax authorities mentioned several transactions it considered as “comparables”, after having analyzed them, the Court ruled that none of them could be used because they involved countries without any links to the countries where the company’s subsidiaries were established.  In addition, the Court also noted that 4 out of 6 comparables mentioned by the tax authorities could not be used because the tax authorities did not prove that the relevant transactions were performed between independent companies.

In this respect, it should be noted that the debate was focused on the burden of proof and the method used by the tax authorities. If the tax authorities do not provide evidence of the alleged profit transfer, they have not met their burden of proof regarding taxes.

Consequently, because the tax authorities did not prove the transfer of profits abroad, as they argued, the Administrative Court of Appeal cancelled the contested decision, which had upheld the adjustments made by the tax authorities, and discharged the additional taxes.