In a decision dated November 3, 1994, the Administrative Court of Appeal of Nancy confirmed the position of the Administration linked to the possibility for stockbrokers to divide cash investments into sectors for VAT purposes.

This decision confirmed the SLF letter sent to the stockbrokers union dated April 19,1979. However, this legal decision does not shed light on the notion of separate field of activity corresponding to the meaning given by Article 213 of Appendix II of the French General Tax Code.

Generally speaking, the domestic laws of most countries do not include specific provisions designed to settle the difficulties raised by capital market activities performed at an international level. They are even less likely to include provisions aimed at so-called "global trading" activities, even though these latter are characterized by the intervention of several actors (sellers, traders, risk managers, analysts, computer technicians...) operating in the various countries where their company carries out its activities.

Basically the expression "global trading" refers to operations relating to the management of rate risk, foreign exchange risk, or stock risk which are continuously and uninterruptedly carried out by French and foreign credit institutions on a daily basis and on a supranational level at different places around the world. Exchange, rate or stock positions can be transferred from one office to another in accordance with the opening and closing hours of the various financial marketplaces involved.

Similar to domestic law, neither international tax law (bilateral tax agreement avoiding double taxation) nor European law (directives and regulations) includes any specific provisions designed to settle the difficulties raised by capital market activities at an international level or by the concept of global trading.

In this context, a French credit institution acting worldwide on the capital market is likely to face technical difficulties which mainly stem from the lack of corporate taxation principles shared by the different countries involved. These problems are the following:

- uncertainty as to the taxation of the activities in the country where the operation is undertaken;

- risk that revenues be subject to double taxation or that expenses incurred double non deduction;

- determination of a fair method of profit allocation among national and foreign entities and/or an appropriate remuneration for rendering services, bearing risk and for the added value produced;

- management of the numerous attribution and valuation rules.

On the other hand problems are also due to the lack of appropriate VAT-rules as regards global trading activities.

Some Anglo-Saxon authors have tried to rationalize those difficulties. Surprisingly, French aspects on global trading activities have been discussed very little so far.


Even when global trading activities are carried out through subsidiaries, the question arises as to whether the parent company is likely to be taxed in the country where its subsidiary is located. To resolve this classical problem, international treaties aim at setting common rules between the signatory countries. Given the highly intangible nature of global trading activities, criteria historically applied in other situations to clarify the difficulties encountered by industrial and commercial companies can hardly be transposed to the case. In addition, the interpretation given by various countries of the international principles is equivocal and necessarily influenced by the domestic laws of the countries involved.

In other words, the exercise of global trading activities abroad via separate entities does not completely suppress the question as to whether a parent company has a taxable activity in the countries where its subsidiaries are settled. It is only through the analysis of the practical conditions of organisation of global trading activities that the above-mentioned ambiguities - along with the possible double taxation consequences - are likely to be reduced, if not eliminated.


The application of numerous tax principles to relations between headquarters and their branches is likely to create a lack of tax neutrality. The comparison between Anglo-Saxon (paragraph 2.2) and French (paragraph 2.3) methods clearly illustrates the multiplicity of theoretical approaches available (paragraph 2.1).

2.1 The diversity of theoretical approaches

As for international tax law, it is usual to distinguish two opposite approaches concerning the transactions between a parent company and its foreign branches.

On the one hand, there is a functional approach which is based on the unity of the legal entity, according to which the sole incomes or charges corresponding to actual exchanges between the company and third parties are taken into account to determine the taxable profits. From this perspective, flows between the parent company and its branches are not included in the taxable result whatever the nature of the revenue or expense may be (financing of the branch office, deduction of interest, internal services, allocation of assets, joint operations, business agent activities, consideration of counterpart risk, transfers of assets, bad debts, additional payments linked to swaps ...).

Accordingly, the sole revenues of transactions with third parties are allocated amongst the various actors of the group.

On the other hand, international tax law also includes a territorial approach based either on the territorial principles of domestic law or on the conventional principle of separate entities. The latter considers relations between headquarters and branches as relations between two companies legally separate and thus does not respect the unity of legal entity. Under this approach inter-company exchanges are subject to taxation although they do not correspond to transactions with third parties.

Between these two extremes, other approaches tend to reduce the contradictions exposed, without, however, reaching any satisfying solution.

OECD comments on Article 7 (corporate profits) clearly set forth the existence of a wide diversity of approaches in the relations between headquarters and branch offices. Paragraph 15 of the comments provides that "some countries consider that whenever a permanent establishment situated on their territory transfers an asset -other than inventory- to a permanent establishment or to the head office of the very same company abroad, the profits made are subject to taxation. Article 7 enables such countries to tax profits resulting from such a transfer in accordance with the methods stipulated in paragraphs 11 to 14" (OECD Model Tax Convention, comments under Article 7, p.C-(7)-(8)).

In a 1984 OECD report on transfer pricing (Transfer Pricing and Multinational Enterprises: Three Taxation Issues ) the Committee on Fiscal Affairs also attests this diversity. The application of Article 7 of the OECD Model Tax Convention to Banking Multinational Enterprises led the Committee to examine the two following questions:

should interest payments between a branch and its headquarters be included in the tax assessment of the branch office?

If the calculation of the gross profits of a permanent establishment needs to be based on the interest actually collected by the establishment, there is a question as to whether the interest paid by the permanent establishment can be neglected and replaced by an apportionment of the total interest paid by the company? (see previous OECD report, no's 43 to 82, pp. 56 to 68).

In the same way the OECD Committee on Fiscal Affairs deals with the problem of the allocation of the revenue of an international banking corporation and more especially with the recognition or the lack of recognition of the transfer of activities or assets between branch offices and headquarters of a single corporation (see previous OECD report, no's 84 to 87, pp. 69 to 70).

2.2 The Anglo-Saxon approach

Traditionally Anglo-Saxon tax systems, especially the American tax system, follow a functional approach. Thus, expenses or costs incurred by a US branch office cannot be deducted from its revenues to the extent they do not correspond to an activity with a third party.

For instance, the remuneration paid to the head office for bearing counterpart risk, interest differential on swaps or losses due to asset or off-balance sheet items transfers, cannot be deducted. In the same way, when third parties charge fees to the headquarters, the deductible part must be reduced from the profit eventually charged by the head office to the branch office.

2.3 The French approach

Some countries, such as France, adopt a position closer to the territorial approach and therefore acknowledge certain "internal" transactions: for example, from a tax perspective, this approach includes interest on "loans" or "borrowings" between a bank and its foreign branch office and requires to perform the "intra-group" transactions at a market value (i.e. including an arm's length margin of profit).

However, the position taken by the tax authorities of a country can obviously not automatically influence the position of the tax authorities of the other countries involved in the transaction. Thus, the refusal of the US tax authorities to allow the deduction of certain items does not prevent the taxation of these profits in the hand of the profit-making company, especially if the latter is located in France. This uncertainty is usually reinforced by the lack of explicit provisions in each country concerned, which complicates the assessment of the risks assumed. To summarise, risks of double taxation or of double non-deduction are significant and cannot be ignored. They can be suppressed or at least reduced only after a detailed analysis of the mechanisms implemented and of the tax approach chosen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. For additional information contact Claire Acard on 33/(1)/55 61 10 10 or Lionel Benant on 33/ or enter text search: "ARCHIBALD ANDERSEN Profile". The members of ARCHIBALD ANDERSEN Association d'Avocats (S.G. Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar and the Lyon Bar.