Transfer pricing rules apply to internal dealings between a French branch and its foreign head office.
A French branch recorded in its accounts interest-free advances granted to its Belgian head office. Further to a tax audit, the French tax administration (“FTA”) considered that the advances constituted an indirect transfer of profits from the branch to its head office and assessed an interest amount in the hands of the French branch.
The taxpayer appealed against the tax assessments. The Lille administrative tribunal and then the Douai administrative Court of appeal both ruled in the FTA’s favor. The company lodged an appeal before the French administrative Supreme Court. Its main argument was that, because a head office and its branch constitute a single legal entity, the branch cannot lend its own funds to the head office or ask the head office to pay any interest.
The French administrative Supreme Court ruled in favor of the FTA, based on the following:
French transfer pricing statutory provisions apply "to any enterprise taxable in France, including a French branch of a foreign company, and the fact that the branch is not a separate legal entity does not prevent such application;"
The advantage provided, in the form of interest-free loans, by a French branch, taxable in France, to its foreign head office constitutes an indirect transfer of profits abroad.
Consequently, the French administrative Supreme Court chose to treat the branch as if it were a separate legal entity. In doing so, the Supreme Court took the opposite position from what was until then the dominant French doctrine. In effect, it was generally considered, based on a legal rather than on an economic approach, that there was no obligation to charge interest, royalties or a profit margin on services within a single legal entity. This approach was the same as the one that prevailed in the Commentaries on the OECD Model Tax Convention until 2008.
With this decision, the French administrative Supreme Court provides a solution consistent with the Authorized OECD Approach on the attribution of profits to permanent establishments (“AOA”) which was incorporated in the OECD Model Tax Convention in 2010, despite the bilateral treaty applicable to the case at hand predating the adoption of the AOA.
The consequences of this decision remain to be precisely assessed. In particular, it should allow interest deductions in France in situations where a French branch receives loans from its foreign head office. However, as always, the facts and circumstances of each case should be examined based on their own merits.