Transfer pricing for SMEs and mid-caps
Does your SME carry out transactions with a related company abroad, a parent company or a subsidiary? Transfer pricing does not concern large groups alone. Any company that carries out flows with a related enterprise established outside France must comply with the arm's length principle. Where this cannot be justified, the tax authorities may add the transferred profits back to taxable income. The firm secures your policy and defends the reassessments, on the scale of an SME.
- Principle
- Arm's length: invoice between related companies as between third parties (French Tax Code art. 57)
- Who
- Any company related to a foreign entity, SMEs included
- Documentation
- Heavy documentation reserved for large groups; SMEs: L. 13 B request
- Flows covered
- Sales, purchases, royalties, management fees, loans, re-invoicing
- Risk
- Transferred profit added back to taxable income, plus interest and surcharges
The arm's length principle
Article 57 of the French Tax Code allows the tax authorities to reassess the profits of a French company that has indirectly transferred them to an associated enterprise established outside France, by way of an increase or reduction in prices, or by any other means. The reference is the arm's length principle (OECD model, art. 9): the conditions agreed between related enterprises must be those that would have been adopted by independent enterprises.
In practice, each intra-group flow must be capable of being justified by a method and a comparability analysis. An unjustified departure from market conditions may support an add-back to taxable income on the basis of an indirect transfer of profits.
SMEs are not out of scope
A common misconception holds that transfer pricing concerns only multinationals. That is inaccurate:
- Article 57 applies to any company related to a foreign entity, whatever its size;
- The mandatory full documentation (Book of Tax Procedures art. L. 13 AA) is reserved for large groups, above high thresholds: SMEs are in principle exempt from it;
- However, during an audit the tax authorities may always ask an SME to justify its pricing policy (Book of Tax Procedures art. L. 13 B); the absence of justification weakens the position.
The SME segment is precisely the one where competition in advisory services is weakest, whereas the stakes, relative to the size of the company, are often major.
Documenting at the right scale
For an SME, the objective is not to produce the heavy documentation of large groups, but to build a proportionate and convincing file: description of the related entities and of the flows, choice and justification of the pricing method adopted, a simple comparability analysis, and retention of market evidence. Prepared upstream, this file turns an audit endured into a controlled discussion and limits the risk of an add-back.
Securing and defending
The firm helps SMEs and mid-caps to map their intra-group flows, to choose a suitable method and to build proportionate documentation. During an audit, the defence bears on the comparability adopted by the auditor, on the economic reality of the functions and risks, and on the interaction with the tax treaties and mutual agreement procedures to eliminate double taxation. The firm carries the dispute before the tax court where necessary.
Transfer pricing for SMEs: your questions
Is an SME concerned by transfer pricing?
Yes. Article 57 of the French Tax Code applies to any company related to a foreign entity, whatever its size. Only the mandatory full documentation is reserved for large groups; SMEs must nonetheless be able to justify their pricing policy.
Must my SME prepare transfer-pricing documentation?
It is in principle not bound by the heavy documentation of large groups (Book of Tax Procedures art. L. 13 AA), but the tax authorities may ask it to justify its prices (Book of Tax Procedures art. L. 13 B). A proportionate file, prepared upstream, is strongly recommended.
Which flows are monitored?
Sales and purchases between related companies, royalties, management fees and re-invoicing of services, as well as intra-group loans and guarantees. Any flow with an associated entity abroad is concerned.
What is the risk where a price is not justified?
The profit deemed transferred abroad is added back to taxable income, together with late-payment interest and, where applicable, surcharges. Double taxation may arise, to be resolved through mutual agreement procedures.
How can one defend effectively?
By discussing the comparability and the method adopted by the auditor, by demonstrating the economic reality of the functions performed, and by relying on the tax treaties. Prior documentation clearly strengthens the position.
A transfer-pricing reassessment targeting your SME?
A confidential initial consultation to audit your intra-group flows, document your pricing policy and defend the reassessments.
Written by
Me François Ouairy, avocat associé en charge du bureau de Paris, expert en fiscalité immobilière, fiducie et fiscalité financière.
This page presents transfer pricing applicable to SMEs for information purposes; each matter calls for a specific analysis, including tax treaties and OECD principles. References to the French Tax Code and to the Book of Tax Procedures in force at the date of writing.