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.
Judgment
The Supreme Administrative Court 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.
(The case was later decided in favour of the tax authorities by the Court of Appeal in January 2020.)
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