Daily Tax Report: International

INSIGHT: France Taxes the Digital Economy

Aug. 8, 2019, 7:00 AM

The French Parliament adopted the long-awaited digital services tax (DST) on July 11, 2019. The bill imposes an entirely new tax on large multinationals that provides certain digital services to consumers or users located in France (taxable services) and for which the annual sums received in consideration for such taxable services exceed certain thresholds.

Its main objective is to update international tax rules that are not suited for companies operating in the digital sector.

Indeed, since the current rules allow a foreign company’s profits to be taxed only if they can be linked to a permanent establishment, a digital company can easily develop its activity via the internet in a territory without having a physical presence and therefore no tax to pay in the state where its customers are located.

On this point, one may note that the Paris Administrative Court of Appeal recently confirmed the ruling pursuant to which Google Ireland is not deemed to have a permanent establishment in France (see INSIGHT: Taxation of the Digital Economy in France—Where are We? Part 1).

It should be noted that the DST is not the first attempt by the French government to implement a tax targeting digital companies. In late 2016, France introduced the so-called YouTube tax, which provided, inter alia, that revenue realized by companies providing streaming videos (such as YouTube or Netflix) is subject to a 2% tax on their French revenue.

The Organization for Economic Co-operation and Development (OECD) has been working for several years on a major reform of international taxation to address these new forms of trade organization.

However, it is difficult to reach a consensus because of the discrepancies between states and in particular the opposition of the U.S., which was initially reluctant to make progress in this area. The same situation is happening at the EU level.

In March 2018, the European Commission proposed a directive laying down rules relating to the corporate taxation of a significant digital presence within the EU. Most EU countries agreed to adopt this Directive but some countries (e.g. Ireland, Denmark, Luxembourg and Sweden) did not, which made it impossible to adopt it because of the unanimity required.

In anticipation of the next agreement to be reached at the OECD in 2020, France has decided to immediately introduce the DST to allow greater participation of large digital companies in public finances.

However, in order to preserve the temporary nature of the tax, members of the French Parliament added to the legislation a mandatory submission by the government to the Parliament of a report on the annual status of international relations. The report will indicate, where appropriate, the date on which a new mechanism implementing a coordinated international solution will replace the DST.

The law entered into force on July 24, 2019.

Scope of the Tax

Pursuant to Article 299 of the French Tax Code, the DST applies to two categories of services, namely:

  • Interfacing services: the supply of a digital interface that allows users, individuals or professionals, to contact and interact with other users, including for the delivery of goods or services between those users; and
  • Advertising services: services provided to advertisers enabling them to purchase advertising space located on a digital interface in order to display targeted advertisements to users located in France, based on data provided by such users (e.g. keywords used in a search engine).

However, certain services are explicitly excluded from the scope of this tax:

  • the delivery of digital content (e.g. streaming video, on-demand music);
  • communication services (e.g. mail paid-for services);
  • payment services (e.g. banking and insurance sectors); and
  • intercompany services (i.e. services provided between companies which are directly or indirectly linked to one another, e.g. services provided within the group for consolidation purposes).

Services Provided in France

Taxable services are those “provided in France.” In the context of services rendered online, this definition is highly important.

The underlying principle is that services (or the turnover generating from data from French users or advertising to French users) would be included from the DST basis provided that one of the individual or a company enjoying the services or goods delivered is located in France.

For instance, a user of a digital interface is deemed to be located in France if he visits such interface through a terminal located in France (determined by any means, e.g. internet protocol address) or, in the absence of an operation, when one of the users has an account that has been opened from France to access these services.

Thresholds for In-scope Services

Entities (either a French tax resident entity or not) subject to DST include those whose annual turnover received in consideration for taxable services cumulatively exceeds (i) 750 million euros ($844 million) worldwide; and (ii) 25 million euros ($28 million) in France. If a company does not exceed both thresholds, it is not subject to the DST.

It has to be noted that for companies which are related to other companies through an exclusive control relationship (within the meaning of Article L. 233-16 of the French Commercial Code), the turnover of the entire group is aggregated when determining whether both revenue thresholds are exceeded.

From a practical standpoint, based on a report prepared by an accounting firm, the companies subject to the tax would be (in alphabetical order): Alibaba, Amadeus, Amazon, Apple, Axel Springer, Booking.com, Criteo, eBay, Expedia, Facebook, Google, Groupon, Match.com, Microsoft, Rakuten, Randstad, Recruit, Sabre, Schibsted, Travelport Worldwide, TripAdvisor, Twitter, Uber, Verizon, Wish and Zalando.

Tax Rate and Base

The DST consists of a 3% single rate.

The DST is based on the amount, excluding value-added tax, of all the sums collected worldwide by the taxpayer in exchange for the provision of taxable services, multiplied by the percentage of those services deemed to be made or supplied in France. In other words, the DST only applies to revenue from French digital services.

The French tax authorities should specify, in the coming weeks, some clarification on this new legislation. One may note that it could be highly complicated for the French tax authorities to audit the basis of the DST, in particular for companies which do not have any physical presence in France.

The amounts to be taken into consideration are those collected as of January 1, including for calendar year 2019.


The company (or a group company responsible for paying this tax for the whole group) will have to pay two installments in April and October of each year with the balance being paid in April of the following year (for example: two installments in April and October 2020 and the balance in April 2021).

As stated above, companies falling within the scope of the DST are liable as from 2019. For the year 2019 only, a single installment will be paid in November 2019 and calculated at 50% of the tax that would have been due for the year 2018. The payment of the balance of the tax due for the year 2019 will be paid in April 2020.

Legal Uncertainty

As the legislation currently stands, some outstanding questions remain. such as the compatibility of the DST with European legislation or international trade rules.

  • At the European level, one can question the compatibility of the DST with the Treaty of the EU and more particularly with the legislation on state aid. The scope of the DST covers a limited number of companies that are almost all foreign companies, which could be perceived as a restriction against them. For this purpose, members of the French Parliament required, in the absence of prior notification of the tax to the European Commission, that the French government submits to the Parliament, within three months from the enactment of this law, a report on the reasons why the DST has not been notified to the European Commission.
  • At the international level, U.S. companies would be the main targets of the DST since, of the 29 companies falling within its scope, 21 are located in the U.S. (Source: The French Digital Service Tax, An Economic Impact Assessment, March 22, 2019, TAJ). For this reason, the U.S. recently announced the opening of an investigation under section 301 of the Trade Act of 1974 to determine whether DST could be analyzed as a discriminatory measure against U.S. companies. At the end of this investigation, the U.S. could impose sanctions against France similarly to what has recently been decided by the U.S. against China.

Planning Points

  • Operators should carefully review whether they fall within the scope of the French DST.
  • Because of the 750 million euro/25 million euro threshold, the impact of the tax should nonetheless be limited.

Bertrand Hermant is Counsel at Taylor Wessing, Paris.

The author would like to thank Antoine Bazart for his assistance in the drafting of this article.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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