Conversant: Back Before the Council of State
In a landmark decision dated December 11, 2020, the Council of State clarified the contractual criteria for determining the existence of a permanent establishment (Council of State, Full Tax Chamber, Dec. 11, 2020, No. 420174, Published) and referred the matter to the Paris Administrative Court of Appeal for application.
In a ruling dated December 8, 2021 (CAA Paris, Dec. 8, 2021, No. 20PA03971), the court had found that theadministration reasoning—that a permanent establishment existed in France—was well-founded. The Court also rejected the company’s arguments challenging the calculations used byadministration determine the taxable income in France, as well as the arguments challenging the existence of a VAT permanent establishment.
The Court had nevertheless ruled that it was not possible to conclude that the company was engaged in a covert activity that would justify extending the statute of limitations and applying an 80% surcharge. The Court had in fact held that“it was only after the tax years at issue that case law adapted the traditional concept of a permanent establishment to the digital economy”and that the company’s failure to file could only constitute an error“given the significant uncertainties existing”at the time the returns were filed.
In its decision last week, the Council of State upheld the reasoning adopted by the Paris Administrative Court of Appeal regarding the existence of a permanent establishment for corporate income tax and VAT purposes, as well as the tax assessment issued by the tax authorities.
The Council of State, however, overturned the Court’s ruling regarding the recovery period and surcharges. Contrary to the Court’s ruling, it held that the company had not erred because“in its decision of December 11, 2020, the Conseil d'Etat clarified the application to the specific case of the companies V. and V. France, as established by the case law of the Court of Justice of the European Union and the Conseil d'Etat the years in dispute, whether for the implementation of legislative provisions or international conventions relating to corporate income tax or for that of provisions relating to value-added tax, as the amendments to the VAT regime applicable as of 2010 did not alter the substance of those criteria. Furthermore, it is clear from the record—and is not disputed—that the level of taxation, with respect to corporate income tax, was, during the years in question, substantially lower in Ireland than in France.”
He therefore considers that the unreported activity has been properly characterized and upholds the tax assessment against the company.