French court outlines new permanent/fixed establishment concept for digital sector

In the ValueClick International Ltd. case, the Supreme Administrative Court in France discussed the rules for the formation of a fixed establishment from a VAT perspective and of a permanent establishment from an income tax perspective, concluding that a permanent establishment for income tax purposes may also arise in the case of a dependent agent who issues and accepts orders that are subsequently routinely approved by the ‘principal company’, presumably also where the agent is not authorised to contractually bind the principal. This may give rise to a permanent establishment in the country in which the agent operates.

When evaluating the existence of a fixed establishment for VAT purposes, the court upheld the conditions previously listed by the Court of Justice of the EU: a fixed establishment for VAT purposes arises where sufficient technical and human resources are present in a given country. However, the lack of sufficient technical resources does not automatically exclude the formation of a fixed establishment for VAT purposes for companies operating in a digital sector, as owing to the nature of their services these companies may have their technical tools essentially anywhere.

According to the court, decisive for the formation of a fixed/permanent establishment is whether a given company has sufficient human resources, e.g. employees, who are authorised to make decisions, e.g. enter into contracts on behalf of the company in a given country, even if only through a dependent agent.