Invoicing at a loss

The French High Court, on June 26, 1996, has stated that a subsidiary, at the beginning of its activity, may, without acting contrary to the arm's length principle, invoice at a loss the manufacturing works it performs for its parent company, insofar as the price used corresponds to the market price. The facts of the Court case were the following:

In the course of its first two years of activity, a subsidiary invoices to its parent company manufacturing works at a price inferior to the cost price, which it justifies by the insufficiency of quantities dealt with during the launching period. It indicates that it afterwards practises a discount in the price asked to its parent company while realising a profit.

The French High Court has considered that the Tax Authorities have not established, with the sole reference to the cost price, that the prices invoiced by the subsidiary during its launching period were inferior to the market price, and afterwards that the losses incurred during this period would not meet the arm's length principle. Thus the Tax Authorities are not entitle to add back to the income the corresponding losses.


This decision of the French High Court confirms that the reference to the competitive market price is an essential criteria of assessment of the normal nature of the price practised within the group. The sole invoicing at a price inferior to the cost price is not enough to prove the existence of an abnormal practice, as this situation might be explained, like in the present case, by the intrinsic conditions of running of the company.

In the present case, the invoicing at a loss was the result of the insufficiency of the cost plan of the subsidiary at the beginning of its activity, as the fixed costs were all the more high since the quantities dealt with were low. But as soon as the production of the subsidiary increased, the cost price decreased and went below the invoicing prices practised during the following years, which were similar or inferior to those of the examined years and which the Tax Authorities were not critcizing.

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