Google not out of the Woods After Landmark $1.25 Billion French Court Victory

July 2017

After a six-year tussle, Google has emerged victorious after the Paris administrative court found in its favour over a PE dispute. But the French authorities have announced their intention to appeal.

Multinational companies that have found themselves in hot water with European tax authorities have found little reason to cheer in recent years as screws tighten across the continent on aggressive avoidance practices and governments look to claw back large sums in back taxes.

But Google’s parent company, Alphabet, claimed a significant victory against the French authorities on Wednesday after the Paris administrative court determined that it did not have to pay €1.1 billion ($1.25 billion) in back taxes the authorities claim are owed between 2005 and 2010.

The authorities argued the company owed taxes in France because it had routed advertising sales from its search engine through Ireland to benefit from the lower corporate tax rate.

But determining that Google Ireland Limited does not have a permanent establishment (PE) in France via Google France, the court declared: "The Irish company Google Ireland Limited is not taxable in France over the period from 2005 to 2010".

Google’s successful defence was based on the provisions of the double taxation agreement signed between France and Ireland, which sets out the requirements of what characterises a PE. 

"The first requirement is that the activity should be performed through a dependent agent, namely here Google France SARL, a subsidiary of Google Inc. in the US," Sandra Hazan, a partner at Dentons in Paris, said. "Here the court has ruled that indeed the French subsidiary was under an economic dependency. But there is a second requirement which is that the 'dependent agent’ should be in a position to sign binding commercial contracts on behalf of the foreign entity."

This, Hazan points out, is where Google was able to provide evidence that the staff of Google France did not have authority to sign contracts with clients or to negotiate the major terms of the contract.

"What is interesting here is that even if the court recognises that they were involved it looks at the ultimate decision making by the foreign entity to conclude that French employees did not have authority," Hazan said.

The French authorities have been relatively contrite since their defeat, praising Google’s activities in the country, however they announced yesterday they would appeal the decision.

If the court’s decision is upheld, it could have an impact on other companies that find themselves in similar disputes with the French authorities.

"The strict legal analysis of the judge disregarding the very extensive interpretation led by the authorities should of course apply in similar situations," said Bruno Gibert, a partner at CMS Bureau Francis Lefebvre, who notes the authorities have become more aggressive in recent years. "And, as is known, the authorities have taken the same dawn raid-PE approach vis-à-vis many companies, in particular, but not only, in the internet/IT sector."

Hazan calls the decision a "landmark" that, if confirmed, will undermine the authorities’ position which considers, when dealing with French clients, French subsidiaries of foreign groups are necessarily performing commercial activities in France.

"Furthermore, this approach fully contradicts the current definition of permanent establishment which is under discussion at the OECD and which basically considers that any type of involvement in a commercial relationship will suffice to characterise a permanent establishment," Hazan said.

The above article was published on on 14 July 2017 and has been republished with the approval of the Publisher.