By Pascal Luquet, Mickaël Duquenne, & Paul Bufort, Grant Thornton Société d’Avocats, Neuilly-Sur-Seine, France
Google has won yet another round of litigation against the French tax authority. On April 25, the Paris administrative court of appeal confirmed that Google Ireland had no permanent establishment in France from 2005–2010. Google was not taxable in France on Google AdWords sales to French advertisers those years because Google France was not able to contract in the name of Google Ireland, the court determined.
The decision, Google Ireland, CAA Paris, 25 Avril 2019, (N°17PA03065 to 3069), confirms the opinion of the administrative court of Paris dated July 12, 2017.
It is still unknown whether the French tax authority has appealed the case to the Supreme Administrative Court (Conseil d’Etat).
While this is a taxpayer win, it should be noted that it is also “pre-BEPS” case. Thus, the decision could be quite different in the future, given the new definition of a permanent establishment in French double tax treaties that are affected by the multilateral Instrument or after recommendations are issued by the OECD on the taxation of the digital economy.
Google Ireland’s arrangement in France
The facts of this case are as follows. Google Inc. entered into a service agreement with Google France on May 16, 2002. This contract was transferred by Google Inc. to Google Ireland Limited on July 1, 2004.
The purpose of the contract was for the provision of services by Google France to Google Ireland, “under [the] authority [of Google Ireland]”.
The contract stated that, while Google France assisted clients and Google Ireland in the selling process, Google France did not act as an agent and did not negotiate nor accept orders for Google Ireland.
The services to be performed by Google France were predominantly commercial prospecting and customer support for Google’s AdWords service in a direct sales organization (DSO) form.
Google’s AdWords is a service allowing companies to display ads in the Google research results. This display is invoiced to the advertising company. The service may be provided in the form of DSO or online sales organization (OSO). The goal of the former is to assist the advertiser in their use of AdWords.
The French tax authority focused on the Google AdWords DSO service given that the assistance was delivered by Google France while the contract was established between the advertiser and Google Ireland. Google Ireland should be regarded in this way as having activity within the French territory, the French tax authority said.
French audit
In the framework of a tax audit, and based on information gathered during a tax raid, the French tax authority attempted to make five adjustments under the assumption that Google Ireland had a permanent establishment in France.
The adjustments assessed corporate income tax (impôt sur les sociétés), withholding tax (article 183 of the French Tax Code), VAT, and the so-called cotisation minimale de taxe professionnelle and CVAE for financial years 2005-2010.
The adjustments, which amounted to €1.1bn (USD 1.2bn), were challenged by Google. According to the Paris administrative court, a permanent establishment could not be identified. The court thus rendered five decisions discharging Google Ireland of the tax assessments on July 12, 2017.
The French minister then appealed. The Ministry of Finance proposed to settle the case, showing that the position of the French tax authority may not be so strong.
French tax authority’s arguments
The French tax authority argued before the Paris administrative court of appeal that, regarding the corporate income tax, Google France was a dependent agent of Google Ireland and can use its facilities. Therefore, Google Ireland should be regarded as having a permanent establishment in France.
Regarding the VAT, the French tax authority claimed that Google Ireland was established in France given that it owns, within the French territory through Google France, human resources as well as materials that are used to sell advertising space.
The French tax authority argued that Google Ireland falls within the scope of the withholding tax (article 183 of the French Tax Code) given that Google is selling advertising space through a dependent agent able to contract in the name of Google Ireland and having a fixed place of business in France.
Regarding the CVAE and the taxe professionnelle, the French authorities said that the selling of advertising space in France is a professional activity carried out by Google Ireland and Google Ireland owns assets located in France dedicated to this activity.
Google Ireland challenged these arguments.
Google France as dependent agent
The Paris administrative court of appeal concluded that Google France is a dependent agent under article 2 9° of the France-Ireland double taxation treaty.
The court said that Google France is dependent on Google Ireland from both a legal and an economic standpoint. Google France does not bear any risk, the court said, because Google France provides services under the instructions of Google Ireland and Google Ireland reimburses Google France for its expenses and adds an 8% margin to it.
The court said that Google France is dependent on Google Ireland from both a legal and an economic standpoint. Google France does not bear any risk, the court said, because Google France provides services under the instructions of Google Ireland and Google Ireland reimburses Google France for its expenses and adds an 8% margin to it.
Contracts, fixed place of business
The Court proceeded to an in concreto analysis of the role of Google Ireland and Google France in the selling process of AdWords.
The analysis of the contract established between Google France and Google Ireland underlines that Google France cannot engage Google Ireland, act as its agent, or sign a contract in the name of Google Ireland. Google France cannot negotiate contracts or licenses nor accept orders in the name of Google Ireland, the court observed.
The court also noted that the model contract between advertisers and Google Ireland leaves a space large enough for Google Ireland to sign.
The court concluded that Google France only provides commercial prospects and AdWords customer support. The fact that Google France employees solve commercial, technical, and delinquency issues does not influence the legal ability for Google France to engage Google Ireland, the court said.
The court also concluded that Google France’s offices do not characterize a fixed place of business of Google Ireland in France.
The court thus concluded that Google Ireland had no permanent establishment in France and that, consequently, no withholding taxes should be applied.
VAT
The court also concluded that Google Ireland did not provide service activity in France for purposes of the value added tax.
Under French law, the actual economic situation of a company is the main criterion for the application of the common system of value added tax. Another establishment will only be considered if the nexus of the activity to the head office is not consistent enough to establish a rational solution or results in a conflict of jurisdiction with another Member State.
The court applied the same reasoning as used in its analysis of DSO service.
Attention is also drawn to the absence of the possibility for Google Ireland to use equipment owned by Google France in France to sell its advertising services.
Those materials are only dedicated to the optimization of the connection speed. Data centers and servers hosting the Google search engine are not located in France, the court noted.
Local taxes
The investigation did not show that Google Ireland had tangible assets – including buildings in France (the same reasoning as used for VAT) – nor that Google Ireland employed workers in France for selling an advertising service.
Thus, Google Ireland cannot be subject to the CVAE nor the taxe professionnelle, the court concluded.
Some thoughts
This decision should not be a surprise to tax professionals given the current trend of the French case law to use strict legal analysis. We believe it likely that the Conseil d’Etat will not challenge the position of the Administrative Court of Paris.
MNEs should consider that this decision, though favorable to the taxpayer and in line with the previous court decisions, as not a 100% guarantee for the future given the new definition of a permanent establishment in some double tax treaties impacted by the multilateral Instrument.
Also, the concept of a digital permanent establishment will add uncertainties if validated by the OECD or EU within the next couple of months.
What is clear is that French tax authority will undoubtedly continue to assess foreign groups based on permanent establishment to create more favorable case law.
— Pascal Luquet is a Partner Head of Transfer pricing and Head of the Japan Desk at Grant Thornton Société d’Avocats, Neuilly-Sur-Seine, France.
— Mickaël Duquenne is a senior Manager within the Transfer pricing department at Grant Thornton Société d’Avocats, Neuilly-Sur-Seine, France.
— Paul Bufort is a junior staff within the Transfer pricing department at Grant Thornton Société d’Avocats, Neuilly-Sur-Seine, France.