Multinational enterprises operating in France become subject to stricter transfer pricing rules

French version

In the continuity of the announcements made by the French Government in June 2023 with respect to its priorities to combat tax, social and customs fraud, the 2024 French Finance Act introduces measures which reinforce transfer pricing documentation obligations for multinationals as well as the French Tax Administration’s arsenal with respect to the audits of cross-border transfers of hard-to-value intangibles (“HTVI”).

The new rules are applicable to tax years opened as from January 1^st, 2024.

Reinforcement of French transfer pricing documentation obligations

Pursuant to previous French transfer pricing documentation rules (article L.13 AA of the French Tax Procedures Code), taxpayers which meet one of the following criteria had to maintain contemporaneous transfer pricing documentation to be provided to the French Tax Authorities on the first day of a tax audit:

• Having annual turnover (excluding VAT) or gross assets exceeding  €400 M, or
  
• Holding, directly or indirectly, more than half of the shares or voting rights of a legal entity meeting the above criterion, or
• Being under the direct or indirect majority ownership or control of an entity meeting the first criterion, or
• Belonging to a tax consolidation group when this group is made up of at least one entity that meets these criteria.

In addition, article L.13 AB of the French Tax Procedures Code provides for stronger transfer pricing documentation requirements targeting intragroup transactions carried out with entities located in “non-cooperating States”.

If the documentation is not provided immediately, or if its incomplete, the French Tax Administration may issue a formal request for the taxpayer to submit it within thirty days. Failure to respond to this formal request will result in the application of a fine, the amount of which:

• cannot be less than €10,000,
• and can reach the highest of the following amounts:
  •  0.5% of the amounts of undocumented transactions or
  • 5% of the transfer pricing reassessment issued under article 57 of the French Tax Code.

In order to strengthen the French Tax Administration's powers and reach within the framework of tax audits, article 116 of the 2024 Finance Act provides for the following:

• Decrease of the turnover and gross assets threshold triggering mandatory transfer pricing documentation from €400 M to €150 M for financial years starting from January 1^st, 2024,
  
• Increase of the minimum fine for missing or incomplete documentation from €10,000 to €50,000 per year, for financial years starting from January 1^st, 2024.
  

Furthermore, as from January 1^st, 2024, transfer pricing documentation becomes binding and enforceable (“opposable”) against the taxpayer. According to the new legislation, if the actual financial results of the taxpayer deviate from the results that the taxpayer would have achieved as a result of the strict application of its transfer pricing policies as documented in its transfer pricing documentation, the difference will be presumed to constitute a transfer of profits abroad.

The taxpayer has the possibility to refute this presumption by bringing the proof as to the absence of a transfer of profits abroad. In practice, this measure implies a shift of the burden of proof on the taxpayer.

Reinforcement of the French Tax Administration’s tools with respect to the audits of hard-to-value intangibles

The 2024 French Finance Act introduces the possibility for the French Tax Administration to reassess the valuation retained within the framework of an intercompany transfer of a hard-to-value intangible asset with reference to the actual ex-post financial results generated by that asset during the financial years following its transfer.

By reference to DAC 6 rules, hard-to-value intangible assets are defined as intangibles for which, at the time of the controlled transaction:

• there are no reliable comparables which could be referred as benchmarks; and
  
• projections of future cash flows or income to be derived from the intangible asset or the hypotheses retained in its valuation are highly uncertain, making it difficult to foresee at the time of the transfer to which extent the intangible asset will ultimately lead to success.

In line with OECD principles, reassessments based on ex-post returns will not be applicable when at least one of the following exceptions applies:

• The taxpayer provides:
  

(i) sufficient details on the reasonable character of the ex-ante projections retained at the time of the transfer, including details on how risks and reasonably foreseeable events as well as their probability of occurrence were accounted for, and

(ii) reliable evidence illustrating that any significant difference between the financial projections and actual outcomes is due either to events which were unforeseeable at the time of the transfer, or to events which were foreseeable at the time of the transfer but whose probability of occurrence was not overestimated or underestimated for valuation purposes.

• The transfer of the hard-to-value intangible asset is covered by a bilateral or multilateral advance pricing agreement, in effect for the period concerned, between the jurisdictions of the transferee and the transferor;
• The difference between the valuation established based on ex-ante financial projections and the valuation based on ex-post actual outcomes is inferior to 20%;
• A commercialization period of five years has elapsed after the year in which the asset first generated unrelated party revenues for the transferee, and during this period the difference between the financial projections made at the time of the transaction and actual outcomes is less than 20%.
  

Finally, in order to make these new tax audit provisions as effective as possible, the French Tax Administration will be able to:

• Perform audits until the end of the sixth year following the year of the transfer (this is an extension of the statute of limitations, which is generally three years);
  
• Conduct audits with respect to years and taxes which have already been audited.