In a decision dated December 11, 2020 (Value Click Case), the French Administrative Supreme Court overturned a Paris Court of Appeal decision dated March 1, 2018, and concluded that the French affiliate of the group (“French Co”) should be considered as the dependent agent of the Irish affiliate company (“Irish Co”) in France for permanent establishment (“PE”) purposes. The decision is a significant reversal of prior court cases, such as the Google decision dated April 25, 2019, and it may lead to the unilateral application by France of an expansive interpretation of the definition of PEs under Article 12 of the MLI adopted with no reservation by France.

Irish Co, a subsidiary of a US group and sister company of French Co, carried out digital marketing activities in Europe, mainly consisting in selling marketing affiliation, media, and technology services in these markets. In France, French Co was remunerated by Irish Co on a cost plus 8% basis for services including marketing activities such as identifying and targeting clients on the French market. The contracts with the French clients were signed by Irish Co.

The French Administrative Supreme Court ruled that French Co should be regarded as a dependent agent in France of Irish Co, even if it did not formally conclude contracts in the name of Irish Co. Indeed the Court concluded that French Co decided on transactions that Irish Co merely and routinely approved.

In reversing the Paris Court of Appeal decision, the French Administrative Supreme Court referred to the Commentaries 32.1 and 33, respectively, of the 2003 and 2005 OECD Model Tax Conventions for the application of the relevant sections of the France-Ireland Tax Treaty dated March 21, 1968. In contradiction to well-established French case law, the French Administrative Supreme Court used OECD comments released after the signature of an applicable tax treaty in support of its arguments.

The decision has corporate tax but also important VAT impacts, since the Court also concluded that Irish Co had a PE in France for VAT purposes.

The profit allocation to the French PE was not addressed by the Administrative Supreme Court, which referred the case to the Paris Administrative Court of Appeal for that purpose. This latter Court is expected to decide on the allocation of profit (or loss) to the PE, taking into consideration the IP and technologies developed and owned outside of France.

This decision does not target digital activities only. Consequently, MNE’s with activities in France should review their business model based on these new developments.