Two court decisions issued in April 2014 by the Nancy and Marseille CAAs confirmed the application of well-established principles with respect to the characterization of a permanent establishment in France where a non-French company is actually managed from France.
In the case reviewed by the Nancy CAA, the same individual held a French company ("FCo") and a Luxembourg company ("LCo"). While FCo used to produce and sell its products, the commercialization thereof had been transferred to LCo, which was consequently selling the FCo products. Following a search and seizure procedure, the FTA gathered, (i) at the domicile of such individual, several key accounting, commercial, and banking documents pertaining to LCo, and (ii) at the FCo head office, most of the commercial management files of LCo (e.g., lists of clients, order books, commercial follow-up electronic files, delivery slips, pricing policy handouts, etc.) that were being processed and operated by FCo employees. On the basis of such evidence and, interestingly, on the basis of additional evidence of the lack of substance of LCo in Luxembourg (e.g., staff, equipment, infrastructure), the Nancy CAA held that a permanent establishment of LCo had to be characterized under both French law and Article 2.3 of the Luxembourg/French double tax treaty, and that the income attributable thereto consequently had to be subject to corporation tax in France.
In a similar set of facts, the Marseille CAA held that the German subsidiary ("GSub") of a French parent company ("FParent") that was in fact wholly managed by, and did not pay any management fees to, FParent should lead to the characterization of a French permanent establishment. The Marseille CAA inter alia noted that the FParent employees were (i) actively involved at all stages of the commercial process that constituted the core activity of GSub (i.e., the provision of interim or temporary staff), and (ii) in fact preparing, negotiating, and signing corresponding commercial contracts with clients that the GSub manager was simply formally validating. The Marseille CAA thus concluded that FParent amounted to a French permanent establishment of GSub as it had the ability to contractually commit GSub with respect to its core activities. The Marseille CAA further noted that, as FParent was not compensated by GSub for the activities it carried out in France instead of GSub, it could in any event not be regarded as enjoying an independent status within the meaning of Article 2 of the German/French double tax treaty. The income thus generated by GSub had to be subject to corporation tax in France.