Permanent establishment: when tax law needs to adapt to globalisation and the digital economy

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Permanent establishment: when tax law needs to adapt to globalisation and the digital economy

The globalisation of trade has led to an erosion of the tax base for States and, with it, a loss of tax revenue. States have acted on this economic transformation and are attempting to adapt to the new reality through various methods, such as cooperation, the BEPS action plan, the implementation of a new multilateral treaty: in summary, the work of the European Commission.

Domestically, France has established measures and, in particular, enhanced checks on companies in relation to these issues. It has led to more regular reclassifications of certain activities carried out in France, expanding the concept of the permanent establishment.

The checks carried out by the tax authority on these issues can take the traditional form of an accounting audit; however, it has become increasingly common that such an audit follows a court-ordered visit to the premises. 

For example, in two Council of State cases (CE 20 May 2016, Sté la Faisanderie and DC Immobilière) the companies concerned were established in Luxembourg and involved in property management and trade. They had a minority shareholding company in France and had purchased property in France in order to sell it again by lots. According to the Council of State, the Luxembourg companies had a permanent establishment in France and were therefore liable for taxes on the activities conducted in the country. For this conclusion, the Council relied on documents collected by the tax authority during a visit to the premises of the minority shareholder in France.

Digital business is also in the cross-hairs of the tax authority. However, the administrative courts have so far refused to take the tax authority’s line that a foreign company marketing a product in France via the Internet has a permanent establishment and is therefore taxable in France for the profits on the local sales (see TA Paris Google 12-7/2017 and CAA Paris, 1 March 2018).

In response to this lacuna between digital trade and permanent establishments, the European Commission has proposed a common reform of corporation tax which would allow Member States to tax the profits made in their territory even if the company is not physically present. A digital platform would thus be considered a virtual permanent establishment in a Member State if it satisfied one of the following criteria in a financial year: 

- It exceeds €7 million in annual revenue in a Member State; 

- It has over 100,000 users in a Member State; or 

- Over 3,000 business contracts for digital services are created between the company and business users. 

These criteria have already been placed in a bill recently set before the Finnish parliament.

Considering the loss of revenue from the untaxed digital economy, France will probably follow the example of Finland very soon... It is only a matter of time!

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