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Specific Transfer Pricing Regulation is now Mandatory for Multinational Enterprises Located in France


After several years of indecision, the French tax authorities have finally issued specific regulation regarding Transfer Pricing for multinational enterprises (MNEs). The new regulation, contained within the French 2009 Corrected Finance Bill, sets out compulsory obligations to which MNEs must adhere: From 1 January 2010 MNEs located in France need to prepare in advance and make available relevant transfer pricing documentation to support their related parties' transactions.

Taxand France discusses the content of the new legislation and the actions MNEs located in France will have to take in order to comply.

The obligations set forth are compliant in substance with the OECD and European Forum recommendations.

1. Scope of the documentation obligation

Pursuant to article L.13AA of the tax procedure code, legal entities based in France and falling under the scope of the tax authorities division in charge of Large Businesses (Direction des Grandes Entreprises) are required to keep, at the tax authorities disposal, documentation supporting the transfer pricing policy applied in the framework of transactions of any kind associated with companies under the meaning of article 39 of the French tax code. The legal entities concerned are those based in France and meet one of the criteria listed in article L.13AA of the tax procedure code.

The main criterion targets companies whose turnover excluding taxes or whose gross assets as mentioned on its balance sheet are higher than or equal to EUR400,000,000. It also includes those that hold directly or indirectly more than half of the capital or the voting rights of a legal entity, organisation, trust or comparable institution based in France or outside France which meets such criteria or whose majority share capital or the voting rights of which is held directly or indirectly by such companies, at the end of the fiscal year.

2. Content of the documentation

In accordance with the recommendations of the Joint Transfer pricing Forum of the European Union and the arm's length principle set out by the OECD, the content of the documentation obligation comprises two levels of information:

a) General information on the group (items covered by the "Masterfile")
The company undergoing a tax audit would be expected to provide the tax authorities with the following:

  • a general description of the business activity developed by the group, including the changes that occurred during the audited tax year
  • an overall description of the legal and operational organisation of the group comprising a clear identification of its key member involved in audited transactions
  • a global review of the functions performed and the risks borne by the associated entities, in-so-far as they have an impact on the audited company
  • a list of the key intangible assets held (such as patents, brand names, business names, know-how etc.) in relation to the audited company
  • an overall description of the group's transfer pricing policy.

b) Specific information on the associated company undergoing a tax audit. This specific information would include:

  • a description of the business activity including the changes that occurred during the audited tax year
  • a description of the operations carried out with other associated companies (comprising the nature of flows and the corresponding amounts, including royalties)
  • a list of cost sharing agreements and a copy of the preliminary agreements on transfer prices and advance tax rulings covering the setting of transfer prices pertaining to the company audited
  • a description of the selected transfer pricing method(s), comprising an analysis of the functions performed, assets engaged and risks borne as well as a justification of the selection and application of the selected transfer pricing method(s)
  • if needed, an analysis of the selected terms of comparison (selected comparables).

Additional documentation requirements are also provided regarding the transactions of any kind with associated companies based or set up in a non-cooperative country or territory.

3. Implementation

The documentation ought to be provided to the tax authorities on the starting date of the tax audit (i.e. on the date of the first operation on the site).

4. Sanctions imposed in case of failure of production or incomplete production of the documentation

  • Where the audited company fails to produce the required documentation or produces incomplete documentation within the thirty-day deadline upon receipt of a formal notice from the tax authorities, it shall be liable, for each fiscal year subject to tax audit, to a penalty amounting to EUR10,000 or, where the corresponding amount is higher than the latter amount and depending on the seriousness of the breach, up to 5% of the amount of transferred profits.

Taxand's Take

The new legislation has been enforced after successive attempts by the French tax authorities to increase the scrutiny on cross border transactions.

Some MNEs may have anticipated this evolution and prepared their Transfer Pricing documentation. However, those that haven't should make sure their documentation is compliant with the new rules and consider updating their comparables. Some MNEs will have to prepare new documentation - possibly by adapting global documentation where available. The penalties for non-compliant documentation could potentially be significant so it so recommended all MNEs check their position.

Your Taxand contact for further queries is:
Antoine Glaize
T. +33 1 70 28 38 88

Taxand's Take Author