Cross-border transactions between affiliated companies Tougher documentation requirements for companies

The French legislator has significantly tightened the transfer pricing documentation regime. From now on, more companies will be required to draw up and regularly keep up to date documentation on the transfer prices applied within the group to which they belong. Penalties for failing to provide documentation have also been increased.

What is a transfer price? What are the associated tax risks?

A « transfer price » is the price of a good or service that a company established in one country charges to a company established in another country and with which it is linked (companies in the same group, permanent establishment, etc.). All companies are concerned if they carry out cross-border transactions with an affiliated company (e.g. transfer of an asset, management fees, etc.).

  • Note: Permanent establishments are also concerned by transfer pricing, even if they do not have their own legal personality.

The French tax authorities ensure that the transfer prices applied within a group do not lead a French company to artificially reduce its taxable profits in France (e.g. by under-invoicing another company for a service, or paying for an over-invoiced service). The tax authorities may tax the identified discrepancies, and add penalties (surcharges of up to 80%, default interests).

  • In practice: The reassessment of a profit transfer may give rise to a risk of double taxation, since the transferred profit has already been taxed in the other country.

However, companies can justify their pricing policy by drawing up specific documentation. This documentation is compulsory for certain companies, and must be made available to the tax authorities in the event of an audit.

  • In practice: Documentation shall be drawn up or translated into French.

Expansion of the number of companies subject to the transfer pricing documentation obligation 

The legislator has significantly extended the list of companies required to produce documentation.

From now on, any company established in France that finds itself in one of the following situations must draw up transfer pricing documentation:

  • The company itself exceeds the threshold of €150 million either in terms of sales excluding tax or in terms of gross assets on its balance sheet.
  • The company, whatever its size, directly or indirectly owns a company that exceeds the €150 million threshold.
  • The company, whatever its size, is directly or indirectly owned by a company that exceeds the €150 million threshold.
  • The company, whatever its size, is part of a fiscally integrated group of which at least one member company is in one of the three previous cases.

Increased minimum fine for missing or incomplete documentation

From now on, in the event of a tax audit in France, if a company fails to produce transfer pricing documentation, or if its documentation is incomplete, the tax authorities may impose a fine of between a minimum of €50,000 (previously €10,000) and a maximum equal to either 0.5% of the amount of the undocumented transactions, or 5% of the undocumented transferred profits.

Obligation to update transfer pricing documentation in real time

The French legislator has created a new presumption of profit transfer where, during a tax audit, a difference is found between the transfer prices indicated by the company in its documentation and the transfer prices actually applied in transactions with affiliated companies.

In the event of a presumption, the audited company can always prove a posteriori that the prices charged are comparable to arm’s length prices. But the presumption mechanism makes it easier to make tax adjustments.

In practice, this new presumption requires companies to update their transfer pricing documentation almost in real time, and also to check regularly that the charged prices are consistent with the documented prices.

Entry into force of the new provisions

The new rules apply to financial years beginning on or after 1 January 2024.

Are you ready for your tax reporting obligations in France? Our firm will be happy to advise and support you. Please do not hesitate to contact us.