The SFS France decision confirms the devolution of the burden of proof in transfer pricing

In order to benefit from the presumption of transfer of profits attached to article 57 of the French Tax Code (“FTC”), authorities must produce a double proof:

  1. Evidence of a non-arm’s length relationship between a French and a foreign entity, and 
  2. Evidence of a transfer of profits to that foreign entity

The second condition, the most problematic and source of recurrent litigations, gave to the State Council the opportunity to rule again in a decision “SFS France” dated from November 29th 2017. (State Council, November 29th 2017, n°399349, SFS France)

Based on article 57 of the FTC, French tax authorities rejected the deduction of commissions and fees paid by a French brokerage and insurance intermediary company to a British related company, without providing the proof of an advantage by making comparisons.

The Bordeaux Administrative Court of Appeal confirmed the position of the tax authorities and the Toulouse Administrative Court by characterizing a relationship of dependence between a French company and a British company, on the basis that the manager and partner of the French company held 56% of the shares of the British company and that the managing director of the French company held 31% of the shares of the British company. The Court also pointed out that the British company realized all its turnover with the French company.

The Administrative Court of Appeal then considered that, in those circumstances, the French company should prove that these advantages had been offset by advantages for its own operation.

Then French tax authorities could reinstate the contested amount, unless the company can demonstrate that this benefit had at least an equivalent consideration. Conversely, the presumption is inoperative if no method of comparison is applied and proof of a liberality granted by the French company must then be provided by the Administration, by establishing the existence of an unjustified difference between the agreed price and the market value of the property sold or transferred.

In this case, the State Council usefully recalls the preliminary obligation for tax authorities to proceed by internal or external comparison, in order to demonstrate the existence of an indirect transfer of profits. The Council thus observes that the administration failed to comply with that obligation and disregarded the strict rules of devolution of the burden of proof applicable to transfer pricing.

Jean-Edouard Duvauchelle

Jean-Edouard Duvauchelle is a lawyer with the transfer pricing team. He joined Taj in 2015.