In its tax return, SFS France had deducted commissions and fees paid to a related party in the UK.
The tax authorities disallowed these deductions on the basis of the arm’s length principle set out in Article 57 of the French tax code, as they considered that SFS France had failed to demonstrate any benefit from these payments to its own operations.
SFS France appealed and the case ended up before the Administrative Court of Appeal, which upheld the tax authorities’ position that it was for SFS France to prove that the commissions and fees paid had been offset by benefits to SFS France.
The case was then appealed to the Supreme Administrative Court, which held that the presumption of a transfer of profits abroad, cf. Article 57 of the French General Tax Code, requires the tax authorities to prove (1) a non-arm’s length relationship with a foreign entity and (2) an indirect transfer of profits to that foreign entity. According to the Court, the tax administration had failed to prove the existence of an indirect transfer of profits abroad and, on this basis, the case was referred back to the Court of Appeal for reconsideration.
Judgment of the Court of Appeal on reconsideration
On reconsideration the Court of Appeal ruled in favour of the tax authorities and upheld the asssesment.
Excerpt in English
“9. Following the audit of the accounts of SFS, the authorities established that LM had no fixed assets and did not pay any staff other than its partners Mr B… and Mr A…, who also held the positions of manager and managing director of SFS France, respectively, as stated above; that these two individuals regularly travelled to London, the costs of which were borne by SFS France and not by LM; that, as revealed in a letter sent on 28 October 2014 by the general representative of Lloyd’s France SAS, SFS France was directly registered with the underwriters of Lloyd’s of London as an authorised business contributor authorised to place risks there; that SFS France, for its own business, maintained direct relations with Lloyd’s representatives, as evidenced by a trip to Reunion Island that it had organised for them in February 2006; the only documents attesting to the activity of Mr A… on behalf of LM consisted of issuing insurance certificates bearing an electronic signature; on the other hand, the complex administrative management of the insurance files subsequently placed with Lloyd’s underwriters required a large number of staff employed exclusively in France and not by LM.
10. In these circumstances, the administration must be regarded as having established that, even if it is neither supported nor, a fortiori, justified by the latter that the price of the services invoiced by the company LM were increased compared to those charged on the market where this company operated, the company SFS France, having nevertheless paid LM a fee without any real consideration, had thus made a profit transfer to its British subsidiary, achieved by means other than an excessive price, which the service was entitled to add back to the French company’s taxable income. It was therefore right that the administration, on the basis of the aforementioned Article 57 of the General Tax Code, should reincorporate the disputed commissions and fees paid in 2004, 2005 and 2006 by SFS France to LM.”
Click here for English translation
cases-com.translate.goog/wp-content/uploads/SFS-France-Jan-2020-CAA-Case-no-17BX03839-ORG.htm?_x_tr_sl=fr&_x_tr_tl=auto&_x_tr_hl=auto&_x_tr_pto=nui,se,elem”>Click here for other translation