THE TAX CONSEQUENCES OF QUALIFYING AS A PERMANENT ESTABLISHMENT ABROAD
CASE STUDY #4
Issue: The concept of permanent establishment makes it possible to assess whether commercial activities carried out in a territory other than that of the residence of the legal entity concerned are taxable at the place of residence or, on the contrary, at the place where the activities are carried out. In other words, if a French company is deemed to have a permanent establishment in a foreign country, there are tax consequences.
Legal issues: A French client, a service provider with 2,400 employees and offices in more than 180 countries, is being challenged on the grounds that its liaison office in a West African country, where several people work for the Paris head office, qualifies as a permanent establishment.
Several criteria are required for qualification as a permanent establishment: fixed business facilities, worksites with a duration of 6 months or more, and the existence of dependent agents, i.e. local representatives authorised to sign contracts and thus bind the French company.
Challenge: To demonstrate that this local presence of the French company in West Africa, although more than 24 months old, is a representative office which does not qualify as a permanent establishment. The people present in West Africa in this liaison office perform tasks that are solely preparatory and auxiliary to what is done at the head office in Paris, which publishes, collects, distributes and markets all content and invoices all customers.
Solutions: It was demonstrated to the Court in Abidjan that the local facility was merely a representative office serving the French head office. This liaison office could not, therefore, be classified as a permanent establishment, and as a result there were no grounds for taxation of its activities.
