Two tiers of analysis
Domestic law: business carried on in France (French Tax Code art. 209, I). Treaty law: existence of a permanent establishment (OECD model, art. 5), then attribution of profits to that establishment (OECD model, art. 7).
Tax litigation · International
The permanent establishment and the territoriality of corporate income tax
The French tax authorities argue that a foreign company has a permanent establishment in France and intend to assess its profits there. For international groups, such reassessments frequently reach several million euros: accumulated corporate income tax and VAT on multiple years, withholding taxes, and an 80% surcharge for hidden activity. The qualification is contested step by step, up to the Conseil d'État when the case requires it. The firm defends foreign companies and multi-jurisdictional groups on both the characterisation of the permanent establishment and the attribution of profits, from Paris and Geneva, in both French and English.
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— In brief
- Territoriality
- Corporate income tax applies to the profits of businesses carried on in France (French Tax Code art. 209, I)
- Concept
- Permanent establishment defined by tax treaties (OECD model, art. 5); case law from Conversant (French Supreme Administrative Court, 11 Dec. 2020, No. 420174)
- Attribution
- Profits attributed to the establishment under article 7 of the OECD model
- Exposure
- Accumulated reassessments of corporate income tax, VAT and withholding taxes across multiple years, frequently reaching several million euros for a group; hidden activity: reassessment period extended to ten years and 80% surcharge
- Profile
- International groups and foreign companies with a presence or teams in France
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Territoriality of corporate income tax and permanent establishment
Under French domestic law, corporate income tax applies only to profits realised in businesses carried on in France (French Tax Code art. 209, I). Where a tax treaty applies, it takes precedence: France may tax the profits of a foreign company only if that company has a permanent establishment in France, within the meaning of article 5 of the OECD model.
The permanent establishment is thus the cornerstone of territoriality. The entire question is whether the presence in France reaches this threshold and, if so, which profits are attributable to the establishment (article 7 of the OECD model). Since the landmark decision Conversant (French Supreme Administrative Court, 11 Dec. 2020, No. 420174), handed down in relation to an Irish company relying on its French sister company, the Court has adopted an expansive reading of the concept of dependent agent, drawing on OECD Commentary issued after the treaty. International groups, particularly those in the digital economy, face the greatest exposure.
Complex litigation
This field is contested before administrative courts up to the Conseil d'État and, on the VAT aspect, in light of case law from the Court of Justice of the European Union. The firm litigates before these courts and has filed preliminary references with the CJEU.
02
The criteria of permanent establishment
A permanent establishment may arise from several configurations, which the tax authorities assess on the facts, contract by contract and function by function:
- A fixed place of business (office, branch, factory) at the disposal of the foreign company;
- A construction site or a project exceeding the duration specified in the applicable treaty;
- A dependent agent who in fact concludes transactions that the foreign company merely endorses, even without formally signing the contracts (Conversant case law);
- A French subsidiary or sister company whose actual role exceeds the intercompany service agreement linking it to the rest of the group.
The exclusions (preparatory or ancillary activities) and the characterisation of a dependent agent are essential grounds for challenge. On the VAT side, the standard is distinct: a permanent establishment requires dedicated human and technical resources (French Tax Code art. 259 et seq.; CJEU Dong Yang C-547/18, Titanium C-931/19, Berlin Chemie C-333/20, Adient C-533/22), and a subsidiary does not, as a rule, constitute the permanent establishment of its parent. This divergence between corporate income tax and VAT shapes the defence strategy for groups.
03
Stakes that extend beyond corporate income tax
Recognition of a permanent establishment has cascading effects: corporate income tax on the attributable profits, but also VAT, withholding taxes and reporting obligations. Where the establishment has not been declared, the tax authorities almost invariably invoke hidden activity: the reassessment period is then extended to ten years (French Tax Procedure Code art. L. 169) and the assessed taxes are subject to an 80% surcharge (French Tax Code art. 1728, 1-c).
For an international group, the reconstitution spans multiple years and multiple taxes simultaneously. It is this accumulation that regularly results in reassessments of several million euros, compounded by the risk of criminal tax prosecution and the risk of economic double taxation if the company's home jurisdiction has already taxed the same profits. Strategy must be settled early, in coordination with the group's advisers in other jurisdictions.
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Practice illustrations
By way of illustration of the firm's practice in this area, without reference to any identifiable file, three typical configurations:
These illustrations are anonymised and simplified; the amounts are orders of magnitude, not verifiable benchmarks. They illustrate the profile of files handled: foreign companies, multiple years, multiple taxes, multiple jurisdictions.
European digital services group
Reassessment exceeding 4 million euros in corporate income tax and VAT across multiple years, founded on qualification of the French sister company as a dependent agent, with an 80% surcharge for hidden activity. Defence focused on the existence of the permanent establishment, the attribution of profits, and the hidden activity characterisation.
Trading company established outside the EU
Reconstitution of an undeclared permanent establishment over the ten year reassessment period, with an overall exposure of several million euros inclusive of taxes and penalties. Discussion of the preparatory and ancillary character of the functions performed in France and the reconstructed base.
Multinational industrial group
Permanent establishment accepted in principle, but attribution of profits contested under article 7 of the OECD model: functional analysis, substantial reduction of the reconstructed base, and mutual agreement procedure initiated to eliminate economic double taxation with the company's home state.
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The firm's lines of defence
Defence focuses first on the very existence of the permanent establishment: preparatory or ancillary character of the activities, independence of the agent, absence of a fixed place of business at the disposal of the foreign company. It then focuses, in the alternative, on the attribution of profits (article 7 of the OECD model) in order to limit the base; then on the characterisation of hidden activity and the penalties; and finally on the elimination of economic double taxation through mutual agreement procedure or treaty arbitration.
The firm conducts these contentious matters before administrative courts up to the Conseil d'État. It has litigated before the Court of Justice of the European Union and filed questions of constitutional law before the Conseil d'État and the Court of Cassation. The firm's dual presence in Paris and Geneva and the handling of files in English facilitate coordination with the tax departments and original advisers of groups: the firm either takes full control of French litigation or provides local support to an existing international team.
Frequently asked questions
Permanent establishment: questions from groups
How can the group measure its financial exposure?
Exposure is calculated by aggregating, across each non-barred year, the corporate income tax on the attributable profits, VAT, any withholding taxes, default interest and surcharges. If the tax authorities invoke hidden activity, the reassessment period can extend to ten years with an 80% surcharge. For a group, the order of magnitude frequently reaches several million euros; the firm quantifies this exposure on first review of the file, before setting strategy.
Does a French subsidiary constitute a permanent establishment of its foreign parent?
Not as a matter of principle. Mere ownership is not sufficient. On the corporate income tax side, everything turns on the actual role: since Conversant (French Supreme Administrative Court, 11 Dec. 2020, No. 420174), a French company that in fact concludes transactions may be characterised as a dependent agent, even without formally signing contracts. On the VAT side, the CJEU applies a stricter standard based on dedicated human and technical resources (Dong Yang, Berlin Chemie, Adient).
Why do the tax authorities invoke hidden activity?
Because an undeclared permanent establishment may be characterised as hidden activity, extending the reassessment period to ten years (French Tax Procedure Code art. L. 169) and triggering an 80% surcharge (French Tax Code art. 1728, 1-c). This characterisation is not automatic: it can be overcome, particularly where the company demonstrates that it has reported its results in its home state and that its position rested on a defensible reading of the treaty.
What is the typical timeframe for such a procedure?
The examination and discussion phase typically extends twelve to twenty four months. In litigation, allow several years for the administrative court and appellate court, and longer if the case reaches the Conseil d'État or requires a preliminary ruling from the CJEU. These timeframes are also a strategic parameter: deferral of payment, security, accounting provisioning and group financial reporting must be managed in parallel.
How does the firm coordinate with the group's original adviser?
According to group governance: either the firm takes full control of French litigation and reports to the tax function, or it acts as local counsel alongside the original adviser, who retains overall supervision. Communications are in French or English, from Paris or Geneva, with a single point of contact and reporting tailored to group committees.
How can the base be reduced if the establishment is recognised?
By contesting the attribution of profits (article 7 of the OECD model): only profits genuinely attributable to the functions, assets and risks actually located in France may be taxed. Functional analysis frequently allows substantial reduction of the reconstructed base. The mutual agreement procedure provided by the treaty then addresses economic double taxation with the company's home state.
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See also
Tax litigation & international
A reassessment based on permanent establishment?
Initial confidential consultation, in French or English, to quantify exposure, discuss the characterisation, limit attribution of profits and exclude hidden activity, in coordination with the group's advisers.
This page presents the permanent establishment with regard to corporate income tax for information purposes; each matter calls for a specific analysis, treaties included. The practice illustrations are anonymised and simplified, and the amounts cited are orders of magnitude without benchmark value. References to the French Tax Code (art. 209, 259 et seq., 1728), the French Tax Procedure Code (art. L. 169), the OECD model (art. 5 and 7) and the case law of the Conseil d'État (11 Dec. 2020, No. 420174) and the CJEU in force as at the date of writing.