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Tax e-Lert - Commissionaire and Permanent Establishment

Zimmer decision: commissionaire and permanent establishment

In a much anticipated decision dated 31 March 2010, the High Court in France disagreed with the French Tax Authorities, stating that a commissionaire acting in the ordinary course of its business cannot constitute a permanent establishment.

Prior to 1995 Zimmer Ltd, a British company, marketed its products in France through its distributor, Zimmer SAS a French company. From 1996, Zimmer SAS (after having sold its assets, inventory and client receivables to Zimmer Ltd) was converted into a commissionaire of Zimmer Ltd and continued marketing the company's products in France; the margin realised by Zimmer SAS was reduced, resulting in lower taxable profits.

Following a tax audit into the accounts of Zimmer SAS, the French Tax Authorities concluded that Zimmer Ltd had a permanent establishment in France and therefore should be assessed to corporation income tax and “business tax” (“taxe professionnelle”) in France accordingly.

The Administrative Court of Appeal of Paris (2 February 2007) had ruled that the facts and circumstances of the commissionaire contract between the two entities resulted in the French company appearing as a dependent agent of the UK Company: it was further concluded by the Court that the French commissionaire was a permanent establishment of Zimmer Ltd in terms of Article 4 paragraph 4 of the Tax Treaty France-UK 22 May 1968.

Following the conclusions of the “Rapporteur public”, Ms. Julie Burguburu, the High Court (CE, 31 March 2010) cancels the earlier decision of the Paris Court and agrees with the taxpayer.

The High Court reconfirms that a company has a permanent establishment in a State, if it employs a person who has the authority to bind the company in a business relationship and that person is not independent vis-à-vis the company . Two criteria therefore need to be met: dependence and the authority to engage:

  • the High Court does not address the issue of dependence (which was not debated in this case as the dependency was already established);
  • concerning the authority to engage, the High Court quotes article 94 of the Commerce Code included in article L-132-1 of the new code and notes that the commissionaire acts in its own name and cannot conclude contracts in the name of its principal. It underlines that the commissionaire does not legally bind its principal because of the nature of the contract. The High Court concludes that a commissionaire cannot constitute a permanent establishment of the principal. However, the High Court also sets certain limits by stating that, when it derives from either the terms and conditions of the commissionaire’s contract or any element identified during the examination of the case that the principal is personally bound by the contract agreement concluded by the commissionaire with third parties, the commissionaire then constitutes a permanent establishment of the principal. The High Court does not, as suggested by the “Rapporteur public”, examine the scope of the comments in Article 5 of the Model Tax Convention of the OECD (paragraph 32-1) on permanent establishment /dependent agent, which were raised by the French Tax Authorities.

This decision favourable to taxpayers is welcome. However, it is important to make sure that the limits set by the High Court are respected. In addition and as pointed out by the “Rapporteur Public”, the French Tax Authorities could try to reassess a commissionaire contract through transfer pricing. The use of a commissionaire structure therefore continues to require careful analysis and caution.

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