In their fight against aggressive tax planning over the past few years, the French tax authorities have significantly increased their focus on multinational digital companies. The 1.1 billion euro ($1.23 billion) reassessment issued against Google Ireland Limited for tax years 2005–2010 epitomizes this approach.
The French tax authorities (FTA) argued that Google Ireland had to pay corporate income tax and royalty withholding tax in France because it had a permanent establishment in France under the France–Ireland double tax treaty through the French Google affiliate, as the latter was regarded by the FTA as performing the advertising sales to French customers booked by the Irish company.
The FTA also considered that Google Ireland owed French VAT and local taxes as it had the human resources and the technical means to allow it to carry out the advertising services on its own.
On July 12, 2017, the Paris Administrative First Instance Court found that Google had no permanent establishment in France (Paris Administrative First Instance Court, 12 July 2017, n°1505178/1-1). Pursuant to the appeal by the FTA, the Paris Administrative Court of Appeal confirmed the first instance court decision on April 25, 2019, despite the new arguments raised by the FTA.
The broad approach of the FTA was not followed by the Paris Administrative Court of Appeal, which adopted a strict legal analysis as it had done in a previous similar case.
Google Ireland Limited, based in Dublin, sells to business customers—notably French customers—a paid referencing service in the Google search engine allowing them to display online advertising (“AdWords”). French customers conclude contracts with Google Ireland to access this service, either directly online, or after having been in contact with employees of the French company Google France assisting them on how to best use the “AdWords” product.
Pursuant to a marketing services agreement concluded between Google Ireland and Google France, Google France was in charge of providing marketing and related services to Google Ireland to support Google Ireland’s sales of advertising to French clients. Services covered included all services, advice, recommendations and assistance required by Google Ireland to support marketing and sales for internet services provided in France, including marketing operations and demonstrations of Google Ireland internet services as well as market/strategic analyses (notably for potential internet services clients).
In the context of tax audits, the FTA considered that Google Ireland should be subject to corporate income tax, withholding tax, VAT and local taxes in France, because it carried on a professional activity of selling advertising through a permanent establishment within Google France.
With regard to corporate income tax, the provisions of the France–Ireland double tax treaty of March 21, 1968 allow Google Ireland’s profits to be taxed in France only if it has a permanent establishment in France, either through a dependent agent who habitually exercises powers in France to conclude contracts in its name, or through a fixed place of business through which it carries on all or part of its activity (Article 2 paragraph 9).
The main argument of the FTA relied on the dependent agent concept. The FTA argued that, despite the terms of the services agreement between the two companies, Google Ireland Limited had intended to trust Google France to conclude contracts in its name with French clients since:
- Google France employees were able to determine whether or not to initiate a commercial relationship with clients;
- the nature of the service, its level and the maximum budget allocated by the client to the advertising campaign, which characterized the main items of the contracts concluded with clients, were negotiated by Google France employees, while Google Ireland only routinely signed the contracts;
- advertising campaigns could start before the signature of the corresponding agreements by Google Ireland, and Google France employees could postpone campaigns or reinitiate campaigns without referring to Google Ireland Limited;
- some internal documents show that employees are hired, trained and paid as “sellers”; and
- Google France employees were in charge of some post-sales activities such as solving commercial or technical problems or taking part in recovery of unpaid debts,and could grant credits or rebates.
In addition, the FTA argued that the French employees had the authority to bind Google Ireland, since under the French civil code provisions the agreement was concluded as long as they had agreed with a given customer on the nature of the service to be rendered by Google Ireland and on its price.
The Court first considered that Google France was dependent on Google Ireland; it was legally dependent due to its service provider status, and economically dependent since Google Ireland was its only client and the compensation structure protected Google France from any risk.
However, the Court found that Google France could not conclude contracts in the name of Google Ireland, for the following reasons:
- the services agreement between Google Ireland and Google France provided that Google France did not have the authority to engage Google Ireland, act as an agent or representative entitled to act as an agent in the name and on behalf of Google Ireland, or sign an agreement on behalf of Google Ireland; and, more specifically, Google France could not negotiate agreements or licenses on behalf of Google Ireland nor receive orders on its behalf;
- the agreements concluded between Google Ireland and the French clients provided that they entered into force once they had been accepted by Google Ireland;
- the fact that the employees assisted French customers to choose key words, and to set the dates, duration and maximum budgets of advertising campaigns did not imply that Google Ireland had intended to allow them to engage commercial relationships in its name;
- Google systematically reviewed agreements before their signature, and had justified that the online campaigns only started once Google Ireland had signed the corresponding agreements;
- the internal reference to sales and the participation in post-sales activities did not mean that the employees were legally able to engage Google Ireland in sales transactions; and
- given that the agreements covered sales of services and not sales of goods, they could not be regarded as concluded as soon as they had been signed by the customer.
As a result, the Court concluded that although Google France was a dependent agent of Google Ireland, it did not have the power to engage Google Ireland in commercial relationships pertaining to its own business. As a result, it could not constitute a dependent agent permanent establishment.
Fixed Place of Business
The FTA argued for the first time before the Appeal Court that the French company constituted a fixed place of business of Google Ireland. However, the Court held that the premises and staff of the French company were at the disposal of the latter for its own activity as a service provider and therefore did not constitute a fixed place of business of the Irish company in France. Therefore, the corporate income tax reassessments were ruled without basis, as were the withholding tax reassessments applied to the royalties paid by Google Ireland to Google Netherlands Holdings for 2009 and 2010.
As regards value-added tax (VAT), the Paris Administrative Court of Appeal also confirmed the absence of permanent establishment, based on the specific definition applicable for VAT purposes.
According to the European Court of Justice, a “provider” permanent establishment is characterized by a sufficient degree of permanence and sufficient human and technical means to be able to provide the services in an autonomous manner.
In this respect, the Court considered that Google France human resources were neither entitled to legally commit Google Ireland nor able to put online the advertising campaigns ordered by customers, and that the computer equipment located in France did not allow the provision of such services.
It is likely that the administration will appeal to the Supreme Court against these decisions. If the French Supreme Court confirms them, it will set a precedent for foreign companies in a similar situation.
However, following France’s ratification of the Organization for Economic Co-operation and Development (OECD) multilateral treaty, the “permanent establishment” definition has been or will be extended, in a number of double tax treaties concluded by France, to any dependent agent who plays the main role in concluding a contract. In addition, both the OECD and the EU are working on the introduction of a digital permanent establishment concept with a view to “better” tax the tech giants.
Annabelle Bailleul-Mirabaud, Céline Pasquier and William Hamon are Attorneys at law with CMS Francis Lefebvre Avocats, France.