Key points
- Transfer pricing concerns any company that carries out transactions with related entities abroad, not only listed multinationals.
- The arm’s length principle requires intra-group prices to be comparable to those charged between independent parties in comparable transactions.
- Above certain turnover or asset thresholds, companies must keep documentation (master file and local file) available from the start of a tax audit.
- Companies below the thresholds remain subject to the arm’s length principle and may face reassessments; only the documentation penalty does not apply.
- Intellectual property royalties, intra-group loans and services are examined closely during audits, with a risk of double taxation if prices are reassessed.
Transfer pricing is not an issue reserved for listed multinationals. Any company that carries out transactions with related entities located in other countries is potentially affected: sale of goods to a foreign subsidiary, services invoiced to a sister company, making a trademark or technology available, cross-border intra-group loan. The question is whether the prices charged match what independent parties would have negotiated under comparable conditions.
The arm’s length principle
The arm’s length principle is the international standard that applies to transactions between entities of the same group. It means that intra-group prices must be comparable to those charged in comparable transactions between independent parties. If intra-group prices fall below this standard (transfer of value to a low-tax entity) or above it (inflating the expenses of a profitable entity), the tax authorities may infer an indirect transfer of profits and reassess.
Which thresholds trigger transfer pricing documentation in France?
Under French law, companies above certain thresholds are subject to specific transfer pricing documentation requirements. These thresholds relate to turnover excluding VAT or gross assets shown on the balance sheet, set at €150 million by Article L. 13 AA of the French Tax Procedure Code (Livre des procédures fiscales) (in French); certain entities related to a company that reaches them are also covered. The companies concerned must keep available to the tax authorities, from the start of a tax audit, documentation setting out their overall transfer pricing policy (master file) and the transactions carried out with related entities (local file).
Failure to produce this documentation after formal notice from the tax authorities exposes the company to a specific penalty (Article 1735 ter of the French Tax Code (Code général des impôts) (in French)), regardless of any reassessment of the prices themselves.
Companies below the thresholds
Companies that do not exceed the documentation thresholds are not exempt from the arm’s length principle. They may face transfer pricing reassessments even without a formal documentation requirement. The absence of a documentation requirement does not mean the absence of risk: it only means that the penalty for failure to document does not apply.
Transactions that receive close scrutiny
Certain categories of intra-group transactions draw particular attention during audits. Intellectual property royalties (trademarks, patents, know-how) are scrutinised closely because they allow significant transfers of value that are hard to compare with market transactions. Intra-group loans are examined for their interest rate and repayment terms. Services are checked for whether they were actually provided and whether the price is proportionate.
Consequences of a transfer pricing audit
If transfer prices are reassessed, the taxable profits of the French entity are increased by the amount of the transfer deemed abnormal. If the foreign entity has already been taxed on the same profits, double taxation may arise. International mutual agreement procedures can, in some cases, eliminate this double taxation, but they are lengthy and uncertain.
For assistance with your transfer pricing policy and documentation, see our transfer pricing lawyer and tax audit lawyer pages.
