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Conseil d’Etat recharacterises the existence of a PE in the digital economy

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The case also raises the practical question of the quantification of benefits and their allocation.

Nicolas Duboille and Hugo Levit of Sumerson analyse why the judges overturned the decision of the Paris Administrative Court of Appeal and ruled in favour of a broad interpretation of ‘dependent agent’.

The French Administrative Supreme Court (Conseil d’Etat) has characterised the existence of a permanent establishment (PE), adopting a broad interpretation of ‘dependent agent’, with regards to a company based in Ireland operating in the sector of the digital economy. This case overturned the decision of the Paris Administrative Court of Appeal.


Valueclick is a US-based group operating in the digital economy, whose activity consists of providing internet advertising solutions for website publishers and advertisers. The groups’ operations in Europe were carried out by its Irish based entity, Valueclick International – later renamed Conversant International Ltd (the Irish entity) – that owned the rights to use the intellectual property of the group for markets outside of North America.

The group had a presence on the French market through its subsidiary, Valueclick France (the French entity), that concluded with the Irish entity a service agreement pursuant to which it provided the Irish entity with marketing support services, management and back-office support and administrative services for a cost plus 8% mark-up. The French entity was involved as a marketing representative for Valueclick International in charge of the preparation, negotiation, and implementation (once executed by the Irish entity) of the contracts. The French entity did not formally conclude the contracts in the name of the Irish one but, habitually decided on transactions that the Irish entity merely endorsed, which, once ratified, engaged the latter.

In this context, the French tax authorities (FTA) considered that Valueclick International was subject to taxation for both corporate income tax (CIT) and VAT in France insofar as it carried out a digital advertising activity with a PE through the French entity of the group. The CIT aspects of this decision are analysed below.

The position of the FTA was, at first, confirmed by the first-degree Administrative Court (Tribunal Administratif de Paris, 7 March 2018 n°1508234/2-1). However, the Court of Appeal (Cour Administrative d’Appel de Paris, 1 January 2018 n°17PA01538) considered, after an analysis of the circumstances at hand, that the Irish entity did not have a PE based on the fact that the French subsidiary of the group did not have the power to bind the latter.

Analysis of the decision

To support its claim, the FTA argued that Valueclick was either (i) a fixed place of business or (ii) a dependent agent, within the meaning of the Article 2, 9-c of the Irish-French double tax treaty. The Court of Appeal rejected the characterisation of both. In its analysis with regards to dependent agent, the court relied on the fact that the French entity could not bind the Irish entity without its approval in the form of a signature regardless of the fact that the signature appeared to be ‘purely formal’.

The French Administrative Supreme Court came to a different conclusion but limited its analysis to the characterisation of a dependent agent. According to the court, the fact that the French entity did not formally engage the Irish one is irrelevant. The court based its argumentation on the fact that in practice, although the main elements of the contracts (including the general pricing) was decided by the Irish entity, it was the French entity that chose to enter into transactions with the clients and it was its teams that performed all necessary tasks for the conclusion of the contract. Therefore, in light of this case, should be considered a dependent agent a French entity who enters into contracts ‘in the name of the foreign company’, whether it signs the contracts or whether it decides, in a usual manner, on transactions that the foreign company merely endorses, even if the French entity does not sign the contracts per se.

With such analysis, the court opted for a broad definition of the dependant agent as per the Irish-French convention, notably relying on the OECD commentaries of Article 5 of the Model Tax Convention (C(5) n° 32.1 and n°33) published after the negotiation of the Irish-French convention (signed in March 1968). It can be debated whether this decision entails the end of an established case law, under which the provisions of a double tax treaty should not be interpreted in light of OECD commentaries published after the adoption of such treaties (i.e., CE, 30 December 2003 n°233894, SA Andritz).

Finally, this case raises the important practical question of the quantification of benefits and their allocation. The Court of Appeal of Paris will have to rule in the coming months on the allocation of profits to the said PE. As in this case, when the PE is a subsidiary already subject to CIT in France, this may result in a double taxation situation, that may be difficult resolve.

French tax authorities could also have tried to reassess the French subsidiary pursuant to transfer pricing rules. However, the proceedings rules applicable in transfer pricing reassessments offer more protection to taxpayers. Additionally, the tax penalties automatically applied by French tax authorities in case of ‘undeclared’ PE amounts to 80% of the reassessed CIT (compared to the 10% or 40% tax penalty applied in case of transfer pricing reassessment).

Nicolas Duboille



Hugo Levit



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