Canada: Transfer Pricing Agreements - France Chapter

Last Updated: April 13 2017
Article by Julien Monsenego

Most Read Contributor in Canada, October 2018

To what extent are a multinational enterprise's intra-group contracts respected for transfer pricing purposes?

While the arm's length principle is meant to be the guideline and reference of any intra-group contract, in order to spread as fairly as possible the income derived from a transaction, this may not always be the case in practice in a situation where parties are related and respective interest may not be divergent. In such cases, article 57 of the French Tax Code (FTC) enables the French tax authorities (FTA) to rectify the income statement declared if any profit has been shifted indirectly out of France, notably via non arm's length contractual terms.

By way of principle, the French tax law still very much relies on the contractual terms when analysing an intra-group transaction. The contract remains the starting point of any tax or transfer pricing analysis, just as outlined by the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines recommendations (Chapter I, Part D.1.2.3 paragraph 1.52 and Chapter IX, Part I.B.1, paragraphs 9.11 and 9.13, for instance). In the field of the French Civil Law, intra-group contracts remain protected by the freedom of contracting, which means that generally the FTA, as any third party,  are bound by the terms of the contract. Conversely, the French civil law does not regulate the level of prices to be determined between the parties or does not provide any form of principle to be complied with when setting up said prices, notably because it would contradict the very principle of contractual freedom mentioned above.

This was illustrated recently when the French Supreme Court (Conseil d'Etat - "CE") gave up the theory of the excessive risk, under which the French judge was able to challenge the deductibility of an expense generated under an operation which would "blatantly" put the concerned company in an excessive risk position: the CE judged that it does not belong to the judiciary body to characterize such a risk and take any consequence from it (CE, July 13, 2016, SA Monte Paschi Banque). More generally, the FTA are not allowed to challenge or discuss the acts of management of a company, notably the contractual terms of its relationships with other parties.

Despite the above, the FTA remains authorized, regardless the contractual position of the parties, to reassess the amount that had been unduly shifted from one party to another, based upon the economic reality, determined under a fair transfer pricing policy. This is the exception to the contractual freedom, set-out by article 57 of the FTC.

If an intra-group contract shows a contradiction with the economic reality of the group, or an abnormal act of management, a tax reassessment can be made to re-establish an arm's length price between the parties and the concerned transaction may eventually be recharacterized accordingly. This illustrates a form of autonomy of the French tax law vis a vis French civil law. However, the CE considers that such mismatch is subject to reassessment except if the concerned act of management can be justified by the reassessed company's own interest, notably when reviewing the terms of the concerned contract. This principle has been applied constantly (CE September 26, 2001, SA Rocadis), and notably in a recent case (CE November 21, 2012, MIN VS PWC), whereby the CE has reviewed a merger agreement and its protocol to identify certain advantages and corresponding obligations of joining a worldwide network, and to consider that certain contributions paid under these arrangements were justified and tax deductible. In another case (Appeal Court of Nancy, August 2, 2007, Clarins BV), the French taxpayer has been able to demonstrate such own interest in a situation whereby it was paying service fees under an intragroup contract which could not be subject to early termination. Such an early termination would have exposed the French paying party to the risk of an indemnification of the other related party, hence justifying the payment of the fees until the term of the contract (and being noted that invoices where documenting the content of the services provided as well). This analysis is actually very much in line with the recommendation of the OECD Transfer Pricing Guidelines (Chapter IX, Part I.E.2, paragraph 9.106, notably).

It should be noted that the FTA are not allowed to deem inapplicable the concerned contracts, but only to amend the economic consequences of said arrangements, when not aligned with the arm's length principle, and except if the abuse of law procedure is implemented. Indeed, in exceptional circumstances, the FTA can use the abuse of law procedure (article L 64 of the French Tax Procedure Code) to literally consider that a contract cannot be opposed, in all or in parts, when its terms are simply fictitious and do not disclose the reality of the operations between the parties. In such a case, the burden of the proof lies with the FTA, and the authorities will need to demonstrate how and why the contract is not aligned with the facts.

To sum up, while intra group contracts should be by way of principle respected by the FTA and used as the primary source of information to determine the respective rights and obligations between related parties, they are not always binding on the FTA, which can rely on economic terms and reality to rule out such agreement and proceed to a corresponding reassessment.

How much emphasis is placed on related party agreements as part of a taxpayer's transfer pricing documentation, or as an important source of functional analysis information?

As a reminder, there are now many provisions under the French Tax law requiring transfer pricing documentation obligations to be complied with, namely article L 13AA (specific obligation beyond certain thresholds) and L13 B (general obligation if a transfer of income is deemed demonstrated by the FTA) of the French Tax Procedure Code and article 223 quinquies B (short form to be provided for companies under the article L 13 AA of the French Tax Procedure Code obligations) and finally article 223 quinquies C of the French Tax Code (new CBCR obligations).

It should be noted that none of these articles specifically requires the provision of the related party agreements as part of the documentation to be gathered and submitted. That being said, it is obvious that these agreements must be ready to be disclosed contemporaneously with any applicable TP documentation, and must match the content of such documentation in terms of functions and risks description, remuneration method and levels, nature of the operations and involved parties etc… .

In addition, if the procedure of article L 13 B of the French Tax Procedure Code is implemented, it is very likely that the FTA will directly require any related party agreement in addition to the TP documentation as such.

More generally, in the course of any tax audit or review of the TP documentation, the FTA will almost every time require such contractual elements to be provided, and sometimes even require such elements before any further TP documentation, notably for smaller audited companies.

What content is expected to be found in related party agreements?

The usual features of any contract are expected to be included: object of the contract, respective obligations and responsibilities of the parties, price and conditions, term etc… .

Obviously, for transfer pricing purposes, the price section is important and should include as many details as possible, including:

  • The remuneration method
  • The use of a budget costs method and/or an actual costs method, and how it applies and is updated from one year to another
  • If based upon costs, the remuneration basis should be as precise as possible on the direct and indirect costs to be applied, and if multiple parties are involved, the allocation method of these costs should be also included (e.g. management services provided to multiple related parties)
  • The documentation of the various components relied upon for the remuneration method
  • The true-up mechanism if any, notably if a TNMM method is applied
  • The notification mechanism in case prices derive during a given year from the norm as set-out by the contract, and how such solution is resolved

It should be noted that it became market practice to have the price section set-out as an appendix, to simplify the amendments over time, without impacting the remainder of the contract, or even amend it by way of exchange of consent over said appendix.

Attention should be also paid to the other clauses, depending on the nature of the operations involved in the agreement. The term of a contract and how early termination mechanisms work can be crucial, notably as the FTA may rely on said clauses to either request an indemnification of the terminated party, or request that the contract is maintained if improperly terminated. Similarly, it is key to have a contractual description of the operations, respective obligations and responsibilities that matches the parties' functions and risks for transfer pricing purposes.

To what extent can taxpayers be held to their related party agreements, even if they are not in line with normal commercial arrangements or economic reality?

There may be situations in which the FTA may use a contractual arrangement in place or formerly in place and oppose its conditions to the taxpayer, even if said conditions are not or no longer in line with the economic reality of what would be expected under normal commercial relationships. We have seen situations whereby the FTA would:

  • Rely on mark-up rates in contracts which are in place, and despite the fact that the updated transfer pricing analysis showed that these rates are no longer appropriate. It is therefore key to update regularly the contracts which are enforced to avoid such situations.
  • Make references to former contracts providing for a higher remuneration and challenge new ones providing for a lower one, notably in post-acquisition situations, where the acquired company sees its profitability decreasing. Here again, only a proper transfer pricing documentation can explain the change, due to changes in the functional profile of the acquired company or due to the fact that it may have been over-remunerated under the previous ownership. These justifications should ideally be included, in all or part, in the new contractual framework between the parties and tie-in with the new TP documentation.
  • Request an indemnification for early termination, as provided formally or not by the intragroup contract, despite the provision of proper evidence of the mutual interest of the parties in cancelling said agreement.  Again, documenting the termination and laying out contractually the mutual benefits of said operation is key.

These cases illustrate the need to match as much as possible and as regularly as possible the contractual and the economic framework of an intragroup relationship.

Is the situation different for certain transactions? For example, financial ones?

No, there is no specific treatment based upon the nature of certain transactions, being financial ones or not. They should all be reviewed under the same principles as the ones laid out above.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions