French Finance Bill for 2024 reinforces tax authorities' power to audit and reassess transfer pricing deficiencies

The Finance Bill for 2024 was approved by the French Parliament and published on 30 December 2023. It contains some measures affecting statutory transfer pricing (TP) requirements in France, as follows:

• Broadened scope for TP documentation requirements (I)
• Required TP documentation to become binding within the framework of tax audits (II)
• Increased penalties for failure to provide complete transfer pricing documentation (III)
• Extended statute of limitations for the transfer of hard-to-value intangible assets (IV)
• Expanded scope to use financial data subsequent to the sale of an intangible asset (V)

Earlier in the year, on 9 May 2023, the French Government had indicated its intention to reinforce measures to fight tax- and customs-related fraud.1 This announcement was in line not only with the law for a State at the service of a society of trust, known as the Essoc law, of 10 August 2018, but also with the law on the fight against fraud of 23 October 2018. The Finance Bill for 2024 therefore reflects a "renewed ambition."2

Broadened scope for TP documentation requirements

As of now, the thresholds triggering the requirement to provide TP documentation (Master File & Local File) to the French Tax Administration (FTA) upon request during a tax audit,3 were:

• Achieving annual revenue, excluding taxes, above or equal to €400m
• Achieving total gross assets above or equal to €400m, a criterion specific to France and thus more complex to assess

These thresholds should be assessed not only at the level of the French entity but also at the level of its parent company or subsidiaries, whether in France or abroad. A (direct or indirect) shareholding of more than 50% of the capital or voting rights in a legal entity at the end of the fiscal year is necessary to be deemed part of a group. It is unusual to use ownership chain statutory accounting data (rather than consolidated data or simply the French entity's data) for all the French and foreign companies.

The 2024 Finance Bill specifies that this threshold is lowered to €150m, increasing the number of taxpayers subject to this obligation.

This measure is effective for fiscal years starting as from 1 January 2024, i.e., TP documentation to be prepared in 2025.

Required TP documentation to become binding for tax audits

The French government's press release remarked that many companies provided the FTA with TP documentation but had not complied with the documentation in practice.

As a remedy, the 2024 Finance Bill amends Article 57 of the French Tax Code (FTC), which makes TP documentation binding on the taxpayer.

This amendment reverses the burden of proof by inserting a purely legal presumption of profit transfer abroad in the event of noncompliance with the policy described in the TP documentation.

The taxpayer can overcome this presumption. However, discrepancies often arise between (i) the policy set out in the TP documentation (often based on International Financial Reporting Standards) and (ii) the statutory accounts of the French entity.

One possibility that cannot be ruled out is that the FTA would use this mere presumption to systematically reassess companies for any discrepancies between the TP documentation and the application of the French entity's transfer pricing policy.

Accordingly, taxpayers and their advisors should be particularly vigilant with respect to French TP documentation and anticipate any variances to reduce the likelihood of a tax audit leading to a tax reassessment.

This measure is effective for fiscal years starting as from 1 January 2024, i.e. TP documentation to be prepared in 2025.

Increased penalties

French TP documentation obligations require taxpayers to present their TP documentation to the FTA at the start of the tax audit, or within 30 days upon formal request.

Failing to submit documentation within the time limit or providing a partial response (i.e., incomplete documentation) used to result in a minimum penalty of €10,000 per financial year.4

The 2024 Finance Bill has increased this minimum penalty to a fixed amount of €50,000 per financial year.

The penalty thus incurred for the failure to provide TP documentation during an audit covering three financial years (typical audited period) amount to a minimum of €150,000.

This measure is effective for breaches committed on or after 1 January 2024. As such, any failure to submit TP documentation within the time limit (or providing a partial response) as part of a tax audit occurring from that date — even if the fiscal years under audit closed in December 2023 or before — will result in the application of these increased penalties.

Extended statute of limitations for transferring hard-to-value intangible assets

Historically, French tax legislation on transfer pricing has been strongly influenced by the principles and recommendations issued by the OECD.

Following the OECD's recent work on hard-to-value intangible assets5 and the inclusion of this work in the 2022 OECD Guidelines,6 it is no surprise that the French regulator has transposed the main contributions of this work into French law.

Thus, Article 22 of the 2024 Finance Bill provides for the amendment of Article 171B of the French Tax Code (FTC) such that the statute of limitations period is extended for the transfer of hard-to-value intangible assets "until the end of the sixth year following the year for which the tax is due"(emphasis added).

Broader scope to use financial data subsequent to the sale of an intangible asset

Hard-to-value intangible assets are also the subject of a new article added to the FTC, which provides that: "The value of a transferred intangible asset or right referred to in 2° of E o II of Article 1649 AH may be adjusted on the basis of results subsequent to the financial year in which the transaction took place" (emphasis added).

Four exceptions to this principle are then listed in the FTC article, namely:

1. When a bilateral or multilateral advance price agreement has been reached for the transfer concerned
2. When the difference between the valuation resulting from the forecasts (ex ante) and the valuation made based on actual results (a posteriori) is less than 20%
3. When a five-year commercial exploitation period has elapsed after the year in which the asset or right first generated income from an entity not related to the transferee and when, during that period, the difference between the forecasts established at the time of the transaction and the actual results is less than 20%
4. Where the taxpayer (a) provides detailed information on the forecasts used to determine prices at the time of the transfer, in particular how risks and reasonably foreseeable events are taken into account and how likely they are to occur, and (b) establishes that any material difference between these forecasts and actual results is due either to the occurrence of events that were unforeseeable at the time of pricing or to the occurrence of foreseeable events, provided that the likelihood of their occurring had not been significantly under- or over-estimated at the time of the transaction

It is worth recalling that, until now, the tax authorities could not rely on the actual results after the transfer of hard-to-value intangible assets as a basis for tax reassessment. This was justified because the taxpayer, acting in good faith, could not have been aware of these points when the valuation was made.

By adopting a simplified version of the OECD principles, the French law appears somewhat to distort the spirit of the OECD work. The OECD Principles do not in any way exclude valuations made based on forecasts. And it is solely when the taxpayer is unable to justify the reasonableness of the forecasts that the OECD recommends using ex-post results.

This amendment to the law could expose French taxpayers to uncertainty around the transfer of hard-to-value intangible assets (if the forecast used differs significantly from the actual revenues generated by the asset).

Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Société d'Avocats, Paris

• Elfie Ossard-Quintaine | elfie.ossard.quintaine@fr.ey.com
• Nadia Sabin | nadia.sabin@ey-avocats.com

Ernst & Young LLP (United States), French Tax Desk, New York

• Frédéric Vallat | frederic.vallat@ey.com
• Mathieu Pinon | mathieu.pinon1@ey.com
• Margaux Bondaz | margaux.bondaz@ey.com

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.