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The French Supreme Administrative Court returns its verdict: the future is still bright for commissionaires

27 May 2010

French tax authorities are constantly challenging commissionaire's structures which nevertheless remain one of the favoured operational organisations used by MNEs. They consider that French commissionaires may not be sufficiently compensated for their actual functions. French tax authorities have come to argue in certain instances that a commissionaire constitutes a Permanent Establishment of its principal to attract the relevant profit to France. Taxand France establishes what MNEs should be doing to mitigate risk and secure their tax position.

A recent ruling from the French Supreme Court clarifies the applicable rules.
With the much-awaited Zimmer ruling that was finally delivered on 31 March, the French Supreme Court ("Conseil d'Etat") corrected the fiscal administration by ruling that a commissionaire, acting within the normal framework of its mandate, cannot constitute the permanent establishment of its principal.

Up until 1995, the British company Zimmer Ltd. marketed its products in France through its distributor, Zimmer SAS. Since then, Zimmer SAS has continued to market Zimmer Ltd's products in France but in the capacity of a commissionaire. After a tax examination, the administration judged that Zimmer Ltd had permanent establishment in France and consequently ordered it to pay supplementary corporate tax contributions.

The Conseil d'Etat had quashed the ruling made by the Paris CAA on 2 February 2007. The latter had taken the view that in this case, the commissionaire agreement between the two entities meant that the French company appeared to be an agent dependent upon the British company and that it could commit the latter in relation to activities specific to it. It then concluded that the French company constituted a permanent establishment for Zimmer Ltd.

The Supreme Court recalled that a company is deemed to have a permanent establishment in France when it has recourse to a person who holds the authority to commit the company in a commercial relationship and that this person is not independent vis-?-vis the company. It ruled that the commissionaire does not legally commit the principal due to the very nature of the agreement binding them.

A commissionaire cannot therefore be classified as constituting the permanent establishment of its principal.
The CE (Conseil d'Etat) bases its ruling primarily on the legal nature of the commissionaire agreement between the principal and the commissionaire. In particular on the fact that, by virtue of its contractual relationship with the principal, the commissionaire is acting on its own behalf and cannot, ipso facto, enter into agreements that might commit its principal. This characteristic of the contractual relationship should not have been set aside by the original judge. Consequently, a commissionaire cannot be deemed to be a dependent agent without verifying that the contracts entered into by the commissionaire actually commit the principal personally.

The commissionaire scheme is used by numerous groups that wish to supply a particular market, given the advantages of such a system of organisation (without being the owner of products which it "sells", the commissionaire nonetheless appears to its clients to be carrying out the transaction on its own behalf, without bearing the risk of client debts, etc.).

Taxand's Take

While this decree makes the situation of such groups more secure in that it increases the obligations of the administration when aiming to re-classify a commissionaire as constituting the permanent establishment of its principal, it should however lead groups which have adopted such a structure to examine their situation carefully. In particular, they will firstly need to verify whether the agreement in place is in fact a commissionaire agreement in legal and practical terms and, secondly, whether the agreements entered into with clients contain any clause which might commit the principal.

Provided that certain precautions are taken in implementing such arrangements, this ruling by the CE (Conseil d'Etat) could well reactivate this method of operation among companies within a more secure fiscal context.

MNEs that have in place or envisage commissionaire's structures in France should review their commissionaire agreements and their contractual relationship with their local clients in order to mitigate the risk of the local entity being viewed as a permanent establishment of its principal.

Provided this work is done, the group will be placed in a much more secured tax position.

Your Taxand contacts for further queries are:
Antoine Glaize
T. +33 1 70 38 88

Nicolas Jacquot
T. + 33 1 70 38 88 08

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