More and more companies, subsidiaries, or branches are created in France under the control of foreign companies established overseas, sometimes in “tax havens” (or dependencies). It is important that your French attorney informs you of any and all transactions that may be considered tax evasion, regardless of whether it has been undertaken intentionally or not.
Promoting goods or services in a trivial or excessive amount may cause a severe reaction from the tax administration...
Indirect Overseas Profit Transfers
Article 57 of the French Tax Code punishes indirect transfer of profit transactions for companies based abroad and not under standard management of the company.
This typically prevents certain practices of "pricing transfers" (transferts de prix), which allow entities to transfer profits abroad that are normally taxable in France.
The targeted companies include those within the corporate tax or income tax classifications (BIC category), who are dependent on or who control the foreign company.
The Burden of Proof
The French Government has the obligation to prove this dependency. The establishment of this at arm's length is not necessary when the business is located in a tax haven.
The indirect transfer of assets is illegal if executed via the manipulation of prices for purchase or sale. It also encompasses the payment of excessive fees or lack thereof, granting loans without interest or at a reduced rate, debt waivers, etc…
The French government must prove that these benefits have been indirectly transferred. In this manner, it can adjust the benefits conferred on the results of the company located in France.
Prior Agreement on Pricing Transfer
A prior agreement for determining a “pricing transfer” can be decided between a domestic or foreign company conducting cross-border transactions and the tax administration.
This prevents any augmentation of taxation on prices as per the accordance between the government and the business entity.
Please note that any disregard from the company of the agreement may lead to its termination.
Additionally, if the administration is suspicious about the validity of transfers, they may request the company to produce any relevant documents or information so as to best convey the relationship with foreign companies.
If no satisfactory explanation is offered, the administration can then investigate the profits transferred based on any information it might possess.
According to Articles 57 and 1735 ter of the General Tax Code (Code General des Impôts), fines may total up to 5% of the profits transferred if the amount exceeds €10,000.
The penalties are identical in the event of failure to produce documentation to help assess the nature of the profit transfers.
Finally, charging or under-charging may cause such penalties. Act reasonably and rationally before the tax administration forces you to! In any case, make sure you follow the advice of your French Attorney regarding these issues.