“VAT Payment: Strict Rules for Foreign Companies”

Companies whose registered office is outside France but that conduct part of their business activity in France (French customers, equipment located in France, employees working in France, etc.) should carefully review their VAT position. In a ruling issued on August 6, the Administrative Court of Appeal of Nancy reiterated the VAT implications of classifying a foreign company operating in France as having a permanent establishment.

In international tax law, a permanent establishment refers either to a fixed place of business (such as premises, equipment, tools, or a physical location) or to a permanent business presence (for example, a dependent agent authorized to negotiate and conclude contracts on behalf of the company) through which a foreign enterprise carries out all or part of its activities in another country. The existence of a permanent establishment determines which state has the right to tax profits generated within its territory.

In the case reviewed by the Nancy court, Prolog International, a Romanian transport company, generated most of its turnover from two clients established in France. Its sole shareholder resided in France, while its managing director was based in Romania. The French tax authorities took the view that the business was in fact operated from France through a permanent establishment and that this activity had not been properly declared there. They reassessed VAT for the period from 2013 to 2018, amounting to nearly €173,000, plus an 80% penalty, and also taxed the profits in the hands of the sole shareholder. Both the Administrative Court of Strasbourg and, subsequently, the Court of Appeal dismissed the company’s appeals.

This litigation provides useful guidance for foreign companies conducting business in France.

Identifying the Connecting Factors with France

The first issue for a company is determining where its business activity is actually carried out.

In the case examined by the Administrative Court of Appeal of Nancy, “this was a Romanian company that was, in substance, conducting its road transport business from France,” explains Philippe de Guyenro, a tax lawyer at Eversheds Sutherland. “Its sole shareholder, an individual, was resident in France. The company’s vehicles and bank accounts were located in France. Drivers were managed from France, and its customers were almost exclusively French. Although it operated under the guise of a Romanian company, there were therefore numerous connecting factors linking the business to France.”

Consequently, locating a company’s registered office abroad is not, by itself, sufficient to prevent the application of French tax rules.

The company must then assess whether it has a permanent establishment at the place where it conducts its activities. It should be noted that, for VAT purposes, the concept of a permanent establishment has two dimensions.

First, “a permanent establishment is characterized by a sufficient degree of permanence and by a structure which, in terms of human and technical resources, is capable either of supplying services or of receiving and using such services,” explains Réginald Legenre, partner at Herald Avocats.