Link maker

Demonstration of a link of dependence within the meaning of article 57 of the CGI

Does the belonging of two companies to the same group imply the existence of a link of dependence within the meaning of article 57 of the CGI?

The context

• A French Permanent Establishment (EP) of a Belgian company, which carries out the beverage bottling activity, entered into a new distribution contract in 2009 with a Swiss company of the same group.

• In this context, the PE, which was acting as a manufacturer in its own right, became a toll manufacturer, on behalf of the Swiss company, involving the transfer of intangible fixed assets and inventories to the Swiss company.

• Following the tax audit covering the 2010 to 2013 financial years, the French tax administration (AFC) considered that the modifications relating to the conditions of activity were not in conformity with article 57 of the General Tax Code (CGI). They concluded that the Belgian company, through its French PE, had granted a benefit to the Swiss company.

• Following an unfavorable judgment rendered by the Administrative Court of Amiens1, the AFC appealed to the Administrative Court of Appeal of Douai.

Legal basis of the decision

1. On the existence of a link of dependence

• Under article 57 of the CGI, the French tax authorities bear the burden of proof of the existence of a relationship of dependence between two entities, unless the transfer is in favor of a company established in a countries with a privileged tax system.

• If the AFC intended to use this exception before the Court of First Instance, it abandoned it before the Administrative Court of Appeal. Therefore, the AFC had to provide proof of the existence of a de jure or de facto dependence between the Belgian and Swiss companies. However, the Court pointed out that the AFC did not provide proof of a legal dependence by indicating that the two companies belonged to the same group, nor proof of a factual dependence.

2. On the existence of an abnormal act of management (substitution of legal basis)

• Although the restructuring led to a drop in turnover and profits, the Court finds that the new contract guaranteed a minimum production volume in a highly competitive market, and rejects the existence of an abnormal act of management.

Scope of the decision

• Once again, the Administrative Court of Appeal of Douai emphasizes that the burden of proof rests with the AFC, in particular with regard to the proof of the existence of a link of dependence between two companies.

• In particular, the Court emphasizes that the fact that two companies belong to the same group does not constitute proof of legal or factual dependence between two companies.

• In practice, the AFC regularly reverses the burden of proof on the taxpayer. Therefore, taxpayers should anticipate and be prepared to provide the evidence, as the French PE did in this case, by demonstrating the absence of dependence or control between the two companies and by providing a comparable study to confirm that the new contract was at arm’s length.