Tax litigation · International

Permanent establishment risk in France: defending foreign companies

A foreign company faces a permanent establishment risk in France as soon as its presence there (an office, a director or salesperson who negotiates, a subsidiary that goes beyond its role, a long-running site) can be regarded as a fixed place of business or a dependent agent. The French tax authorities then tax in France the profits attributable to that establishment; depending on the flows and resources involved, VAT and withholding taxes may be added and, where the establishment was not declared, invoke hidden activity: a ten-year reassessment period and an 80% surcharge. The firm defends foreign companies and international groups facing a tax audit on this ground, as well as their directors where the procedure exposes them personally. Since 2015, it has represented more than 280 clients in tax audit or tax litigation proceedings; of the 232 linked to a country of address, 188 were based outside France, in 23 countries. Work is conducted in French or English, from Paris and Geneva.

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Analysis by François Ouairy, partner · Paris · Updated 5 October 2026
— 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
01

Territoriality of corporate income tax and permanent establishment

This page deals with risk and defence. For the definition of a permanent establishment and the detail of its tests (fixed place of business, dependent agent, preparatory or auxiliary activities), the firm has a separate page.

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.

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).

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

Five situations that recur in tax audits

Permanent establishment risk in France most often arises from ordinary facts, which the tax authorities reread during a tax audit. Five configurations recur in the firm's files:

The director based in France

A director or salesperson who negotiates and concludes, from France, the contracts of a foreign company. Remote work by a key function from France has become an audit ground in its own right.

The place of effective management

A foreign company, often a Luxembourg, UK or Swiss holding company, whose decisions are in fact taken in France: the company may then be regarded as having its real seat in France and taxed on the profits of the business thus carried on in France (French Tax Code art. 209, I), which often cover most of its profits, subject to the applicable treaty.

The long-term premises

An office, premises or even a home used on a lasting basis for the business of the foreign enterprise.

The subsidiary that goes beyond its role

A French subsidiary whose teams act on behalf of the parent and habitually play the principal role leading to contracts that the parent routinely concludes without material modification, beyond what the intercompany services agreement provides. Ownership alone is not enough.

The long-running site or service

A construction site or a long-term service in France whose duration exceeds the threshold set by the applicable treaty.

03

What the authorities examine

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.

04

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.

05

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.

06

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.

Lead counsel: François Ouairy

François Ouairy, partner admitted to the Paris Bar, leads the firm's work on permanent establishment: upfront analysis, assistance during the audit and defence before the tax authorities and the courts. The firm is ranked Best Lawyers 2026 and Recommended in taxation of international groups by Leaders League (2026).

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 requires that no return was filed within the legal deadline and, for a lawful activity, that the activity was not declared to the one-stop business formalities office. It is also set aside where the company shows that it made an error justifying its failure to comply, for the surcharge as for the reassessment period (Conseil d'État, 21 June 2018, No. 411195); for a company that met its obligations in its home state, this is assessed in light of the level of taxation in that state and the exchange of information between the two administrations (Conseil d'État, 7 December 2015, No. 368227).

Does an employee working remotely from France create a permanent establishment of the foreign employer?

Not automatically. It depends on the permanence of the workplace, whether it is at the disposal of the enterprise (a home may, on the facts, constitute a fixed place of business) and on the functions performed: an executive who habitually negotiates and concludes contracts from France exposes the employer far more than an operational role. The applicable treaty and the precise facts determine the answer.

What is the difference between a permanent establishment and a place of effective management?

A permanent establishment makes taxable in France the share of the business of a company that remains foreign, and a place of management is itself one of the treaty examples of a permanent establishment. Re-characterisation as a place of effective management goes further: where the key management decisions are taken in France and the foreign seat is fictitious, the company may be regarded as having its real seat in France; it is then taxed on the profits of the business carried on in France (French Tax Code art. 209, I), which often cover most of its profits, subject to the applicable treaty. It is a factual test: where strategic decisions are really taken, banking powers, accounting, staff.

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.

Cité par

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.

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This page presents the permanent establishment with regard to corporate income tax for information purposes; each matter calls for a specific analysis, treaties included. Client statistics come from the firm's billing records (2015-2026). 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), BOFiP (BOI-IS-CHAMP-60-10) and the case law of the Conseil d'État (11 Dec. 2020, No. 420174; 7 Dec. 2015, No. 368227; 21 June 2018, No. 411195) and the CJEU in force as at the date of writing.