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Identify the criteria that determine the location of the company's effective headquarters
In a context where management functions within a group are increasingly divided between several entities located in different countries, the question arises as to in which country the group's parent company has its effective headquarters located.
The group's place of effective management is the place where the strategic and commercial decisions essential to the conduct of a group's business are taken. Although a group may have several seats of management, there is only one place of effective management, which is the decisive criterion for establishing the tax residence of the group's head entity.
This article analyzes the tax issues related to the location of the place of effective management and highlights the criteria used by recent case law to establish the location of a company's effective headquarters.
The location of the company's place of effective management raises major tax issues, in particular:
The country in which the place of effective management is located is used to determine the company's tax residence, and therefore the place where it is liable for corporate taxation .
Investigations carried out by the French tax authorities to determine the company's place of effective management may lead to the identification of a permanent establishment, operated on the premises of a group entity in France, as constituting the group's de facto place of effective management. The result is not only corporate tax reassessments over a period of up to 10 years (the statute of limitations applicable in cases of hidden activity), but also penalties of 80% on the corporate tax due.
A decision taken by the Council of State ("Conseil d'Etat") on March 15, 2023 highlights how the location of the company's effective headquarters directly affects the tax treatment of dividends received by its shareholders.
In its decision, the French Council of State established that the location of the company's place of effective management was in France, and not in Luxembourg, thereby modifying the tax situation of the company's shareholder. His status changed from that of a French tax-resident shareholder of a Luxembourg-resident company to that of a French tax-resident shareholder of a company whose tax residence is in France. This reclassification has an impact on the taxation of dividends received by this shareholder, which become French-source dividends rather than foreign-source dividends (CE, 10th and 9th ch., March 15, 2023, no. 449723, Sté CA Animation).
The French tax authorities do not limit themselves to formal appearances, such as the company's registered office as declared in its articles of association. It favors a realistic, fact-based approach to determining a company's actual headquarters.
To this end, it is increasingly resorting to raids in offices, which enable it to collect a certain number of elements that will constitute a bundle of clues, on which it relies to determine the location of the company's effective place of management.
French courts also adopt a factual approach, relying on a set of criteria to locate the place of effective management. These criteria include :
Here is an overview of three recent case law in France on the location of the company's effective headquarters and the criteria used by the judges to requalify a company's tax residence.
The transfer of a holding company's registered office abroad (to Luxembourg) does not necessarily entail the transfer of its place of effective management.
In this case, the French tax authorities, followed by the judges, took the view that the company had retained its place of effective management in France, on the basis of the following factual elements:
Elements taken into account by the judges
Although the boards of directors and shareholders' meetings were held in Luxembourg, this was not sufficient to demonstrate that the company's place of effective management was in Luxembourg.
This position is in line with previous case law of the Council of State (CE, March 7, 2016, n°371435, Sté Compagnie internationale des wagons-lits et du tourisme), which held that the place where the boards of directors are held does not, on its own, justify the location of the place of effective management. In this case, the public rapporteur considered that: “if all a holding company had to do, at the time of the Thalys, was to relocate its board meetings to the country of its choice, in order to relocate its taxable profits, it would be tax optimization, rather than legal certainty, that would come out on top”.
The Luxembourg company had only :
- a 13 m² office rented from a domiciliation company,
- a Luxembourg director belonging to the same domiciliation company,
- a Luxembourg accountant, employed by the same domiciliation company, who worked only 10 hours a week.
Even for a holding company whose business requires few resources, a minimum level of physical installation and human involvement is required to perform the necessary decision-making, administrative and financial functions.
The financial, accounting and tax management of the Luxembourg company was carried out from France. For example, bank transfers for the Luxembourg company were issued from France, and VAT returns, although filed in Luxembourg, were received by an accounting firm in France before being filed in Luxembourg.
The two co-founders and directors of the Luxembourg company were domiciled in France. They managed the Luxembourg company from its establishment in France at the same time as the other group companies.
The Douai Administrative Court of Appeal has upheld the reclassification of the place of effective management of a Luxembourg company, on the grounds that the company's strategic decisions and operational management were in fact exercised from France.
Background
Following a raid at the French company's premises, the French tax authorities considered that the Luxembourg company had a permanent establishment in France. This permanent establishment, operating from the premises of the French company, was engaged in the management of brands owned by the Luxembourg company.
The judges ruled that the Luxembourg company's effective place of management was in fact in France. As a result, the Luxembourg company was liable for corporate income tax and VAT in France. A surcharge of 80% was also applied for the discovery of a hidden activity.
Elements taken into account by the judges
The judges of the Douai Administrative Court of Appeal relied on factual elements, in particular those seized during the raid at the French company's premises.
The Luxembourg company had only a registered address in Luxembourg and a 30 m² office. It had no employees in Luxembourg, and relied on personnel made available to it for administrative and accounting tasks.
In addition, the fact that management meetings were held in Luxembourg was not considered sufficient to establish that the company's effective headquarters were located there, in accordance with the case law of the Council of State.
Contrary to the Luxembourg company's assertion that the French company was merely “passively” exploiting the brands (by collecting royalties), the information gathered during the raid revealed that the French company was actively involved in managing the brands, developing existing franchises and seeking new franchisees.
The evidence seized during the raid revealed the organization of communication meetings with all managers and franchisees, as well as the existence of a “communication plan including actions and objectives to develop and perpetuate the clientele of one of the Group's brands”. These elements demonstrated that strategic decisions concerning brand development were taken in France and not in Luxembourg.
Other items seized at the French premises showed that the day-to-day management of the Luxembourg company was also carried out from France, including :
- invoices issued in the name of the Luxembourg company,
- bank statements for the Luxembourg company
- trademark license agreements stored in a pouch, relating to relations between the Luxembourg company and its franchisees.
These elements confirm that the French company was responsible not only for the operational management, but also for the accounting and administrative follow-up of the franchises.
The Paris Administrative Court of Appeal has issued a decision similar to that of the Douai Administrative Court of Appeal of August 17, 2023 (see above), confirming that the effective place of management of a foreign company, in this case a company incorporated under English law, was located in France.
Background
Following raids carried out at the premises of a company incorporated in England, as well as at those of the French companies in the group, the French tax authorities concluded that the UK company's place of effective management was in France and not in the UK. This conclusion was based on the absence of economic substance in the UK and the centralization of management and decision-making within a group company in France, which is the group's effective headquarters.
As a result, the UK company was subject to corporation tax and local taxes in France. A surcharge of 80% was also applied due to the discovery of a hidden activity.
Elements taken into account by the judges
The decision was based on factual elements demonstrating the following:
The UK company was domiciled at the offices of its chartered accountant in the UK. It had few, if any, employees to carry out its business.
The French tax authorities described the company as a mere “letterbox”, citing its lack of substance in the UK.
The documents seized during the raid showed that :
- decisions relating to dividend distribution and capital increases were taken and signed in France;
- the British company's commercial strategy was developed entirely in France;
- all the directors of the UK company were resident in France, and there was no evidence of their actual presence in the UK for strategic decision-making or day-to-day management;
- the directors received only intermittent and limited remuneration from the UK company.
Documents seized at the group's French premises confirmed that the day-to-day management of the UK company and its relations with customers, suppliers and banks were carried out from France. These included :
- contracts, invoices, accounting and legal documents,
- correspondence with the British tax authorities,
- engagement letters addressed to the UK company's statutory auditors.
Until 2017, the OECD considered a company's place of effective management to be “the place where the key managerial and business decisions necessary for the conduct of the entity's business as a whole are fundamentally taken. All relevant facts and circumstances must be taken into account in determining the place of effective management.” (OECD Commentary, C (4) n°23). The concept of the place of effective management was a criterion used to determine the tax residence of a company, in the event of disagreement between two states.
Since 2017, the OECD Model Tax Convention no longer refers to the place of effective management of companies, but recommends resolving residence disputes through a mutual agreement procedure, taking several criteria into account.
This approach is repeated in Article 4 of the Multilateral Instrument.
France has not adopted the wording set out in the Multilateral Instrument. It continues to favor the application of the criterion of the place of effective management to determine the tax residence of a company.
Moreover, certain tax treaties concluded by France explicitly provide for the definition of the place of effective management, such as the Franco-American and Franco-German tax treaties.
Determining the place of effective management is essential for establishing a company's tax residence. It is therefore necessary to ensure that the persons responsible for strategic decisions are located properly and that the company has sufficient substance. This substance is characterized by adequate human and material resources, enabling the company to perform the functions necessary for its activity.
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