France vs SAS Groupe Lagasse Europe, January 2020, CCA de VERSAILLES, Case No. 18VE00059 18VE02329

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A French subsidiary, SAS Groupe Lagasse Europe, of the Canadian Legasse Group had paid service fees to another Canadian group company, Gestion Portland Vimy.

The French tax authorities held that the basis for the payments of service fees had not been established, and that there was no benefit to the French subsidiary. The payments constituted an indirect transfer of profits within the meaning of the ‘article 57 of the general tax code;

Excerps from the judgement of the Court:

11. Under the terms of article 57 of the general tax code, applicable in matters of corporate tax under article 209 of the same code: “For the establishment of income tax due by the companies which are dependent or have control of companies located outside of France, the profits indirectly transferred to the latter, either by increasing or decreasing the purchase or sale prices, or by any other means, are incorporated into the results recognized by the accounts (…) “. These provisions, which provide for the taking into account, for the establishment of the tax, of the profits indirectly transferred to a foreign enterprise which is linked to it, establish, as soon as the administration establishes the existence of an arm’s length and from a practice included in their forecasts, a presumption of indirect transfer of profits which can usefully be opposed by the taxable business in France only if this provides proof that the benefits which it has granted have been justified by obtaining counterparties.

12. In addition, under the terms of article 39 of the general tax code, applicable in matters of corporate tax under article 209 of the same code: “1. The net profit is established after deduction of all charges, these comprising, subject to the provisions of 5, in particular: 1 ° General expenses of any kind (…) “. If, under the rules governing the allocation of the burden of proof before the administrative judge, applicable unless otherwise provided, it is in principle for each party to establish the facts which it invokes in support of its claims, evidence that only a party is able to hold can only be claimed from that party. It is therefore up to the taxpayer, for the purposes of the abovementioned provisions of the General Tax Code, to justify both the amount of the charges he intends to deduct from the net profit defined in Article 38 of the General Tax Code as well as the correction of their accounting entry, that is to say the very principle of their deductibility. The taxpayer provides this justification by producing all sufficiently precise elements relating to the nature of the charge in question, as well as to the existence and the value of the consideration which he has derived from it.

14. Secondly, SAS GROUPE LAGASSE EUROPE and Gestion Portland Vimy (the service provider), signed, on May 17, 2005, a service agreement which provides that “the service provider undertakes towards the beneficiary, who accepts it, to provide its assistance and advice in the performance of the services listed below, it being specified that this list is not exhaustive “. The services provided by Gestion Portland Vimy to SAS GROUPE LAGASSE EUROPE are defined in article 2 of the agreement and concerned assistance and advice in the areas of commercial prospecting and marketing, IT, finance, business development for the subsidiaries of SAS GROUPE LAGASSE EUROPE and the general administration.

15. The tax authorities questioned the deductibility of the sums paid within the framework of the execution of this agreement to the company GPV by the SAS GROUPE LAGASSE EUROPE by noting that this company, which has no turnover that the “management fees” paid by its French and German subsidiaries, the companies LCetI and LCetI GmbH and for financial products that the dividends distributed by the company LCetI, achieved respective operating results of 604,239 euros and 1,394,256 euros during 2009 and 2010, due to the very high cost of the fees invoiced by the company GPV, up to 937,901 euros in 2009 and 1,237,526 euros in 2010, even though it partially invoiced these fees to its subsidiaries, without the reality of the services billed by GPV being really established.

16. If the applicant has produced a certain number of invoices issued by the company GPV and relating either to services of the nature of those provided for in the aforementioned agreement of May 17, 2005, or to travel or subsistence expenses which would have been exposed for the provision of these services, it does not however provide any information, such as, for example, diaries, meeting minutes, legal acts relating to the management and administration of the subsidiaries concerned or more generally any other document relating to the services in question, which would be such as to justify their actual performance. The materiality of these services is not more established by the certificate obtained from the tax services of the province of Quebec and the terms of the memorandum and the report written, after the period verified, by the consulting firm, “Cinq Mars Conseil “, Which only relate to the relationships maintained by SAS GROUPE LAGASSE EUROPE with its French subsidiary, the company LCetI without justifying the existence of services rendered for the benefit of this subsidiary by the company GPV and the assumption of responsibility of the cost of such services by SAS GROUPE LAGASSE EUROPE. In these conditions, the existence of a real counterpart to the sums paid by this company to the company GPV cannot be regarded as demonstrated.

17. Consequently, the tax authorities were right to regard the sums paid to the company GPV as having the nature of an indirect transfer of profits within the meaning of article 57 of the general tax code and the has been reintegrated into the taxable income of SAS GROUPE LAGASSE EUROPE in application of these provisions and those of article 39 of the same code.

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