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Annabelle Bailleul-Mirabaud and Céline Pasquier CMS Bureau Francis Lefebvre, France
Annabelle Bailleul-Mirabaud and Céline Pasquier are Attorneys at law, CMS Bureau Francis Lefebvre, France
The French tax authorities have been paying particular attention to multinational digital companies for several years, culminating in a 1.1 billion euro tax reassessment for Google issued for tax years 2005 to 2010. However, a landmark decision by a French court has found that Google had no permanent establishment in France.
Over the past few years, the French tax authorities (“FTA”) (as other European tax authorities) have paid particular attention to multinational enterprises (“MNEs”), and in particular U.S. digital enterprises, in their fight against aggressive tax planning. The French Ministry of Finance recently reported that the GAFA (Google, Apple, Facebook and Amazon) had already been subject to total tax reassessments of 2.5 billion euros in 2015 and that ongoing audits for tax years 2013 to 2015 should lead to additional reassessments of similar amounts.
This includes the 1.1 billion euro reassessment issued to Google for tax years 2005 through 2010, which gave rise, after six years of fighting, to landmark decisions of the first level Paris Administrative Court in favor of Google on July 12, 2017. The FTA have however announced their intention to appeal.
The FTA argued that Google Ireland had to pay corporate income tax and withholding taxes in France because it had a permanent establishment in France under the France-Ireland double tax treaty through the French Google affiliate, as the latter was regarded by the FTA as performing advertising sales towards French customers booked by the Irish company. The FTA also considered that Google Ireland owed French VAT and local taxes as it had the human resources and the technical means to allow it to carry out the advertising services on its own.
This extensive approach of the FTA was not followed by the Court, which adopted a strict legal analysis, thus providing additional arguments to other MNEs involved in similar disputes with the FTA, notably U.S. digital companies.
Analyzing the case in more detail helps to better understand the respective positions and their potential application to other cases.
Pursuant to a marketing services agreement concluded between Google Ireland and Google France, Google France was in charge of providing marketing and related services to Google Ireland to support Google Ireland's sales of advertising to French clients. Services covered included all services, advice, recommendations and assistance required by Google Ireland to support marketing and sales for internet services provided in France, including marketing operations and demonstrations of Google Ireland internet services as well as market/strategic analyses (notably for potential internet services clients). The agreement specified that when providing assistance for sales support, Google France did not have the authority to engage Google Ireland, act as an agent or representative entitled to act as an agent in the name and on behalf of Google Ireland, or sign an agreement on behalf of Google Ireland; and, more specifically, Google France could not negotiate agreements or licenses on behalf of Google Ireland nor receive orders on its behalf.
The FTA considered that despite this agreement, Google France employees had in fact the authority to conclude advertising agreements in the name and on behalf of Google Ireland, based on the following information they had gathered:
In addition, the FTA considered that Google France was entitled to sign confidential agreements on behalf of Google Ireland Ltd “to facilitate the assessment of products commercialized by Google […] and as the case may be the conclusion and execution of a commercial transaction” and referred to the fact that clients had agreed to renounce their rights against Google France “and any other company of the Google group” in transactions on judicial actions.
The Court considered that the factual elements alleged by the FTA did not characterize Google France authority to conclude agreements in the name and on behalf of Google Ireland within the meaning of article 2 of the double tax convention concluded between France and Ireland. It ruled that (i) Google France was a dependent agent of Google Ireland from a legal and economic perspective, and that (ii) it did not have the authority to engage Google Ireland in its proper business.
On this second matter, the Court's analysis first relied on the content of the agreements concluded (both the marketing services agreement between Google Ireland and Google France and the agreements concluded between Google Ireland and the clients) and then examined the facts alleged by both the FTA and Google, to conclude that the facts alleged by the FTA were not sufficient to demonstrate that Google France employees were entitled to act in the name and on behalf of Google Ireland. The Court noted that the advertising agreements were concluded between the client and Google Ireland only, and considered that the FTA had not demonstrated that the general stipulations of the agreements had not been determined by Google Ireland nor that advertising would have gone live without a definitive validation from Google Ireland (even if it were to be considered a purely formal control), while such validation conditioned the effectivity of the agreement from a legal standpoint.
The Court also emphasized that the cost of the advertising subscribed depended on an automated auction system and on web user clicks, and therefore not on the intervention of Google France employees.
In these decisions, a strict interpretation of the “authority to act in the name and on behalf of” a foreign company based on legal agreements prevailed, in line with the Zimmer case law of the French tax Supreme Court ( Zimmer case, Conseil d'Etat 31 March 2010 n° 304715 and 308525).
The French Minister of Finance hinted that this amounted to form prevailing over substance and announced that the FTA would appeal. However, it is, in our view the right approach as long as the new dependent agent permanent establishment definition advocated by BEPS Action 7 and inserted into the Multilateral Instrument signed on June 7, 2017, has not come into effect. Under this approach, a dependent agent permanent establishment would basically be characterized as soon as employees in a country have a predominant role in the conclusion of agreements by residents of this country with a foreign company. This new definition should, however, not apply for now in a France–Ireland context as Ireland has made a reservation in this respect.
From a VAT perspective, the Court resorted to a different reasoning based on the EU VAT case law interpretation of the notion of permanent establishment: the Court held that Google Ireland had no permanent establishment in France based on the absence of human or technical means in France, as the servers were located outside of France and the maintenance activity performed in France did not relate to the main advertising activity.
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