Google Ireland Limited does not have permanent establishment in France

by Orrick, Herrington & Sutcliffe LLP

Orrick, Herrington & Sutcliffe LLP

The Paris administrative court ruled on July 12th, 2017, that Google Ireland Limited did not have to pay $1.3 billion in back taxes in France for the period 2005-2010.

The Irish company Google Ireland Limited sells digital services like its online advertising platform "AdWords" to French customers. The French company Google France provides, under a contract with Google Ireland Limited, commercial assistance and advice to French customers of Google Ireland Limited who subscribe to its "AdWords" service. Google Ireland Limited and Google France are subsidiaries of the U.S. group Google Inc.

The French tax authorities ("FTA") argued that Google Ireland Limited, based in Dublin, was engaged in a professional activity in France for the sale of advertising through a French permanent establishment, namely, Google France. They claimed $1.3 billion in back business taxes (corporate income tax, withholding tax, value-added tax, etc.) on this ground. Despite the terms of the Marketing and Services Agreement concluded between Google Ireland Limited and Google France providing that Google France did not have the power to act for or on behalf of Google Ireland Limited or to execute any contract or agreement on behalf of Google Ireland Limited, the FTA claimed that the employees of Google France were "de facto" invested with the power to conclude contracts on behalf of Google Ireland Limited.

Google Ireland Limited's defense focused on the definition of the permanent establishment provided by the double taxation treaty signed between France and Ireland. According to Article 4 of this treaty, the existence of a permanent establishment is subject to two cumulative conditions: (i) the dependence of Google France towards Google Ireland Limited and (ii) the power of Google France to habitually enter into legally binding commercial contracts on behalf of Google Ireland Limited.

The Paris administrative court agreed with Google and ruled that Google France could not be considered as a permanent establishment of Google Ireland Limited in France for the following reasons:

  • None of Google France's employees are invested with the power to act on behalf of Google Ireland Limited with the French clients. Even if Google France's employees are involved in negotiations, the ultimate decision to conclude advertising contracts is made only by Google Ireland Limited;
  • Google France does not have the necessary human resources or technical means to carry out the advertising services on its own.

The FTA have announced their intention to appeal the decision.

This case needs to be considered in light of the OECD's Base Erosion and Profit Shifting ("BEPS) initiative and Article 12 of the Multilateral Instrument (the "MLI") which was signed by 71 countries as part of the implementation of BEPS. Article 12 focuses on tackling the artificial avoidance of permanent establishment status in the context of commissionaire and similar arrangements and modifies the definition of a permanent establishment set out in the current OECD model tax treaty in a way that would allow France to subject companies operating as Google Ireland Limited to corporate taxes in France. This being said, modification of the treaty signed between France and Ireland will not be possible without the consent of the Irish authorities and, for the time being, Ireland, which has signed the MLI, reserved on the entirety of Article 12.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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