Transfer pricing and substance of foreign entities
Transfer pricing: documentation duty, adjustments under article 57, and the substance expected of a group's foreign entities.
Contents
The situation
A trademark royalty paid to the foreign parent. A recharge of head office costs. An interest-free intragroup loan. A distribution subsidiary that structurally earns a thin margin.
None of these is unlawful. All of them must be supported by a method and by comparables, and that file is the first thing an inspector asks for.
What the rules say
Article 57 of the French tax code allows the authorities to adjust the result of a French business where profits have been indirectly transferred to a related enterprise established outside France.
| Duty | What it requires |
|---|---|
| Transfer pricing documentation | kept available by businesses above the statutory thresholds, produced at the start of the audit |
| Simplified annual return | for businesses above a turnover or gross asset threshold |
| Country-by-country report | for groups above the consolidated turnover threshold |
| Penalty | a fine where documentation is missing or insufficient, independently of the adjustment |
Added to that is the question of substance: a foreign entity that invoices must perform the functions it claims to perform, bear the risks it claims to bear, and have the corresponding resources.
What the firm does with those rules
Before an audit, the work is to write the pricing policy: identify the intragroup flows, choose and justify a method for each, gather comparables, and draft the documentation before it is requested. Documentation written during an audit does not carry the same weight.
During the audit, it is to defend the method rather than the outcome, and to challenge the comparables chosen by the authorities, which are often the weak point of the adjustment.
Afterwards, it is to obtain the corresponding adjustment in the other State, which only the mutual agreement procedure can deliver. See mutual agreement procedure.
Frequently asked questions
Does this concern a small business?
Article 57 applies without any threshold. Only the formal documentation duty is reserved for businesses above the statutory thresholds. A smaller company must still be able to justify its prices.
Is an interest-free intragroup loan a risk?
Yes, it is among the most frequent adjustments. The rate is justified by reference to what an independent lender would have required.
What happens without documentation?
The authorities may impose a fine, and above all they build their adjustment with their own comparables, which then have to be fought.
Can prices be secured in advance?
An advance pricing agreement can be negotiated with the authorities, including on a bilateral basis.
This article sets out a general framework and is no substitute for a review of your file: every situation has its own dates, figures and documents.