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This chapter is not exhaustive and is limited to broadly outline the tax consequences of the main events occurring when doing business in France. It does not constitute a tax advice or a client - attorney relationship. Materials are not suitable for tax analysis. Visitors are invited to consult a tax lawyer before taking any decision.
The determination of transfer prices is not rocket science and is often the ground for long and costly conflicts with tax authorities. Like most revenues, the French tax authorities "DGI" request that the tax payers document and support the rationale of the transfer pricing method applied.
Transfer prices must be established according to one or several recognized transfer pricing method(s). The choice of the relevant method strongly influences the ability of a tax payer to convince the DGI. As the administrative cost of each transfer pricing method may vary significantly, the tax payer must choose carefully its strategy to achieve the best security with the lowest cost.
The transfer prices may be one of the largest tax exposure of multinational companies because the same profit may be taxed in several jurisdictions e.g. country of the seller and country of the purchaser. With penalties and late interest, the corporate income tax may be equal or higher than the gross margin related to the transaction under audit.
Properly advised, the tax payer should be able to reduce significantly its tax exposure without spending disproportionate fees for the development of a relevant transfer pricing policy and/or to manage transfer pricing audits.
The French transfer pricing rules apply the OECD arm's length principle (to know more about this subject check " Definitions ". A transfer pricing audit must be performed by the DGI as part of a formal tax audit (to know more about this subject check " Tax audit "). In order to propose a transfer pricing assessment, the DGI must establish that the French tax payer and the foreign party are related i.e. the two parties are controlled by the same shareholder having the majority of the capital, or the majority of the voting rights, or if one entity controls directly or indirectly the other one.
Two parties are also considered as related when the French tax payer is de facto controlled by a foreign entity. If the foreign party is resident in a tax haven, the French tax authorities are not requested to prove that the parties are related. Once the DGI has proved that the parties are related or deemed related, the DGI must demonstrate that profit is transferred abroad through transfer prices.
As soon as the DGI suspects during a formal tax audit that a French entity transfers profit to a foreign related party, the tax auditor may request the information listed below:
 Transfer pricing method used by the French entity (to know more about this subject check " transfer prices methods " )
Relations between the French and the foreign entity
Business activity of the foreign entity.
Tax treatment of the foreign entity. The taxpayer must be able to answer precisely the questions listed below within a 2-month period. Upon acceptable justifications, the French tax authorities may accept to extend one month the initial two months period. The maximum period never exceeds 3 months. If the entity do not answer or provide an answer which is not clear enough, the French tax authorities may assess:
7,500 euros penalty for each tax year under audit.
An estimate profit transferred abroad calculated by using only the information in their hands. If the entity provides a satisfactory answer, the tax auditor decides either to agree with the transfer prices or to propose an assessment. If the auditor proposes an assessment, the procedure is similar to the procedure applicable to type of tax audit .
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