A French company, engaged in sale in France of a kitchen appliance for some elements of which the company or its Chairman owned the patents, entrusted manufacture of most of the parts and assembly to a Swiss company.

The French tax authorities, considering that there was a dependency between the companies and that the price billed by the Swiss company was abnormally high, included in the earnings of the French company a part considered to be excessive of the amounts paid to the Swiss company and treated as a profit transferred abroad under article 57 of the French Tax Code.

Under that article, profits indirectly transferred, by a French company dependent on or controlling firms located outside France, to a foreign company by means of an increase in sales or purchase prices, or by any other means, are recaptured in the earnings of the French company.

Dependency may be de facto or de jure: in this case, the authorities had proven neither; the Conseil d'Etat held that the "close community of interests" had not been proven by the absence of a contract governing commercial relations between the two companies, nor by the conviction of the French company's Chairman for tax evasion, nor by the fact that the French company was dependent on the Swiss company "both for its supplies and for the determination of prices" (Conseil d'Etat, March 18, 1994, Nr. 70-814).

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