Normally, a sales agent and a buy-sell distributor would not be regarded as comparable owing to the differences in functions, assets and risks relevant to each party. However, in a recent French court case, France vs. SAS Sames Kremlin, March 2023, it was determined that the independent agents and distributors were comparable based on the relevant facts. The court ruled that the commission paid to independent agents served as a comparable uncontrolled price ("CUP"), and therefore, the commission payable to distributors should be determined in a similar manner as that of independent agents.

As surprising as the court's decision may at first appear, upon further consideration, it becomes apparent that the court's finding seems to be correct. Taxpayers who do not adhere to the basic principles and processes of transfer pricing to arrive at a correct application of the arm's length principle do so at their own peril.


The taxpayer marketed its products either through its subsidiaries or independent agents. In certain countries, it sold its products through its subsidiaries in those countries under either a buy-sell distributor agreement or a commissionaire agreement. In other countries, it sold its products through independent agents to whom it paid a commission.

The remuneration of the independent sales agents was set at 20% of turnover, irrespective of the nature of the products and equipment sold. Subsidiaries, however, were renumerated based on the amount of the discount they would have received if they had acted as a buy-reseller, and this remuneration was payable irrespective of the nature of the products and equipment sold.

The arguments

The Revenue authorities argued that there was no justification for the remuneration paid to the subsidiaries for the intermediation commission to be higher than the 20% rate granted to the independent representatives.

The taxpayer argued that the geographical markets in which the subsidiaries operated were fundamentally different from those in which the third-party sales agents operated. This was because they were highly strategic for the business as key customers were located there, while the other markets where the agents operated were of lesser importance.

The subsidiaries responded to major requests to tender, while the local sales agents were only involved in the supply of spare parts and small equipment. Additionally, the subsidiaries played a crucial role by providing:

  • Marketing support
  • After-sales service
  • On-site assembly and equipment testing
  • Assistance with debt collection

These activities demanded a substantial workforce dedicated to the subsidiaries' operations.

The taxpayer further argued that the commissions paid to independent sales agents could not constitute a relevant comparable for assessing the nature of the remuneration paid to foreign subsidiaries. The commissions paid to the subsidiaries took into account the margin they would have made on a purchase-sale of the product.

The court's finding

The court found that the difference in the remuneration between the independent agents and the subsidiaries (economic agents belonging to the group) could not be justified since both were involved in the same intermediary activity, which must be distinguished from the purchase-resale activity.

Based on the evidence, it was not clear that the services provided by the independent intermediaries were significantly less substantial than the services provided by the subsidiaries in their intermediation activity alone. When acting as intermediaries, the subsidiaries should be remunerated as such and not for their buy-sell activities, which were separate from the intermediation activities.

The turnover achieved in the countries where the independent agents operated was generally lower than that achieved by the subsidiaries, but the turnover of the subsidiaries was not systematically higher than the turnover achieved by the independent agents. It was found that the characteristics of these markets did not justify the differences in the remuneration paid to the subsidiaries and independent agents. Furthermore, there was no evidence that services provided by the independent agents were significantly less substantial than the services provided by the subsidiaries in their role as intermediaries. The mere fact that the subsidiaries had greater material and human resources was not sufficient to presume, in the absence of any evidence to the contrary, that those resources were used for the intermediation activity.

Where did things go wrong for the taxpayer?

To ensure that a transaction between related parties is at arm's length, a two-step approach is required: a functional analysis followed by a comparative analysis. The terms and conditions of the transaction, which is to be tested must be similar to those that would have been entered into by unrelated parties in similar circumstances.

To accurately identify or delineate the actual transaction between related parties, the commercial and financial relations between them must be carefully examined. Consideration should be given to the economic sector in which the parties operate and any factors which would affect the performance of businesses operating in that sector.

The role which each party plays in the transaction must be defined, and a number of "economically relevant "or "comparability factors" should be determined. These include the contractual terms between the parties, a detailed analysis of important functions, assets employed and the assumption of risks. A group value chain analysis should be performed. Other factors to be considered would be the characteristics of the property transferred or services rendered and whether these are tangible or intangible, etc. Market-related factors and business strategies should also be taken into account. If this analysis is correctly performed, then the relevant transaction between connected parties will be correctly delineated.

The root cause of the taxpayer's difficulties lies in the fact that the two very different roles which the subsidiaries played in their countries were not adequately analysed, and the functional analysis relating to each role was not correctly conducted. By correctly following the steps required to delineate the actual transaction that the subsidiary was concluding when acting in its capacity as an intermediary rather than as a purchaser-reseller, the differences in the two roles would have been clearly identified. The consequence of not making these distinctions was that the incorrect transfer pricing method was applied, and the subsidiaries were inappropriately remunerated when transacting in their capacity as intermediaries.

After correctly delineating the transaction, the correct transfer pricing method must be selected. The court confirmed that, in this case, the CUP method was appropriate for determining the remuneration to be paid to the subsidiaries. An internal CUP was available in the form of the commissions paid to independent agents, and this was then applied to the remuneration paid to the subsidiaries when acting in their capacity as intermediaries.


This case illustrates the importance of applying the basic rules and processes correctly to arrive at the appropriate arm 's-length arrangements between the parties.

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.