Why did Paris tax judge cancel Google’s 1.2 Billion Euro tax and penalties?

  • Paris Court Decision of July 12, 2017

On July 12, 2017 Paris Administrative Court (“the Court”) ruled in five decisions of the same day, that Google Ireland Limited had not any permanent establishment in France between 2005 and 2010, i.e., during the tax years subject to the disputed French tax adjustments and therefore discharged Google from 1.2 Billion Euro adjusted tax and penalties.
Very quickly, on July 13, 2017, the French tax authorities declared lodging an appeal against the Court’s decisions. The process before the Court of Appeal could take about 1 to 2 years.

  • Key Question

The key question before the Paris Courts was to determine if Google Ireland Limited had a permanent establishment in France.

  • The Context : Challenge of Google Dutch sandwich by French tax authorities

The facts concerned the tax years 2005 to 2010. Google operated in France through a scheme called the Dutch Sandwich by which:

  • Google Ireland Limited, having its actual place of management in Ireland and benefiting from the tax treaty between France and Ireland, had contracted a service agreement for support and marketing services supplied by Google France a French subsidiary of Google Inc. and Google International LLC;
  • Google Ireland Limited provided online advertisement services through Google website which was used by French business customers (B to B services) who were invoiced by Google Ireland Limited being specified that the Adwords could be subscribed in 2 alternative formula:
    • OSO : the customers managed totally their campaign
    • : Google France assisted the French customers create and manage their campaign
  • Google France charged Google Ireland Limited on a Cost+8% basis;
  • Google Ireland Limited was held by Google Ireland Holding having its actual place of management in Bermuda and regarded as non resident of Ireland and holding the Google IP for EMEA licensed to Google Netherlands Holdings B.V.
  • Google Ireland Limited paid IP royalties to Google Netherlands Holdings B.V. In accordance with the Irish-Dutch Tax Treaty, no withholding tax was paid in Ireland.
  • Then Google Netherlands Holdings B.V. then made further royalty payments to Google Ireland Holdings, which payments also were exempt from withholding tax because the Netherlands does not have an outbound royalty withholding tax.
  • did not tax the receipts, because Google Ireland Holdings was considered a Bermuda tax resident for Irish tax purposes. Neither did Bermuda impose any tax on these earnings.
  • The whole involved European companies checked the box in the USA and were disregarded for the US Corporate tax purposes. Upon repatriation of the money to the U.S., it pays U.S. corporate tax on the dividends it repatriates.


That entire scheme has been challenged by the French tax authorities (the “FTA”) considered as a tax avoidance; the FTA made raids in the facilities of Google France and used the exchange of information with Ireland, the Netherland and the USA and performed tax audits.

  • Attempt of the French tax authorities to characterize a permanent establishment in France

As result of such tax investigations, the FTA concluded that Google Ireland Limited has a permanent establishment in France through the human resources and the equipment of Google France and consequently considered that the income derived from the DSO Adwords services charged to French customers were attributable to a French Permanent Establishment and consequently claimed 1.2 Billion Euro French taxes and penalties for:

  • for VAT (434 Million Euro), French Corporate Tax (3088 Million Euro), French Business tax (6 Million Euro)
  • French withholding tax on the royalties paid by Google Ireland Limited to Google Netherlands Holdings B.V considered as attributable to a Permanent Establishment in France and therefore taxable in France (366 Million Euro)

Google Ireland Limited disputed the tax adjustments before the Court.

  • The Court’s reasoning: to characterize a Permanent Establishment, a dependent agent shall have the legal authority to conclude the contract in the name of an enterprise

The Court, accordingly to the Court’s general advisor, ruled that the terms of the tax treaty in force between France and Ireland (“the Tax Treaty”) did not allow characterizing a permanent establishment in France.
Indeed, the Article 2 of the Tax Treaty provides that “A person acting in a Contracting State on behalf of an enterprise of the other Contracting State, other than an agent of an independent status…, shall be deemed to be a permanent establishment in the first-mentioned State if he has, and habitually exercises in that State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise”
The FTA argued that Google France shall be considered as dependent agent of Google Ireland Limited insofar as it was controlled by Google group but also because its unique source of income was Google Ireland Limited. The Court admitted that Google France was a dependent agent from both a legal and an economic point of view.
The FTA had also considered that notwithstanding the fact that the Employees of Google France did not have the legal authority to conclude contracts in the name of Google Ireland Limited, they had  a de facto the power to conclude contracts.
The Court did not admit the FTA’s argument of de facto power of concluding contracts and considered that the Tax Treaty requires the authority to conclude contracts. Indeed, the Adwords contracts were signed on line by the customer and Google Ireland Limited, the latter’s signature being a formal electronic signature of a contract prepared by Google France employees.

The fact that no campaign had been online before signature by Google Ireland Limited convinced the Court that Google France employees did not have the authority to conclude the contract.

  • The case-law ground of the Court’s decision : “Zimmer LTD” case 31/03/2010

The Court’s decision is in line with a case-law ruled by the French Administrative Supreme Court (“Conseil d’Etat”) of March 31, 2010 “Zimmer LTD” in a case involving the tax treaty between France and the UK which has a similar provision than the France-Ireland Tax Treaty. So, there is no special treatment of Google in this case. The Court applied a case-law which is grounded on the literal interpretation of the Tax Treaty and provides a legal security to citizens and enterprises.

  • Effects of the Court’s decisions

A first effect of the Court’s decisions is that the adjusted taxes can no longer be collected and if, as required by the tax procedure, Google Ireland Limited has paid the taxes or had supplied a bank guaranty, any payment shall be refunded and any guaranty be released.
So, that seems difficult how and on which legal ground the Court of Appeal could reverse the Court’s decisions given the above mentioned Zimmer LTD case-law and the terms of the Tax Treaty. However, the magnitude of the stake at hand, around 1.2 Billion Euro may, unexpectedly, have an effect on the Court of Appeal, which would of course be harmful for the legal certainty for tax payers and foreign enterprises wishing to invest in France
Besides, in 2016, the French National Financial Prosecutor, Mrs. Eliane Houlette, made raids in Google France facilities and engaged tax fraud criminal investigations based on the suspicion that Google Ireland Limited has a permanent establishment in France. Today, such investigations are weakened but the National Financial Prosecutor could prevail from the appeal against the Court’s decisions for holding her position.

  • Impact of the Multilateral Convention to prevent BEPS

The Organization for Economic Cooperation and Development (OECD) has recently extended the criterion for a permanent establishment to that of a dependent agent that doesn’t have the legal authority to bind an enterprise, but acts on behalf of an enterprise by habitually concluding certain contracts or playing the principal role leading to the conclusion of these contracts. This new definition came about as a result of the OECD’s Multilateral Convention to prevent base erosion and profit shifting (BEPS) that France signed onto to implement tax-treaty-related measures.
Once the Multilateral Convention’s new criterion will enter into force for the signatory states (about 70 States including all EU States but not the USA), the above mentioned “Zimmer Ltd” and this Google case law will be obsolete for similar cases and for the facts occurred after such entering into force.
However, the extension of the definition of permanent establishment by Multilateral Convention potentially creates double-taxation or even multiple-taxation and may lead to a “tax world war” because each state will seek to claim a tax base in their country and create legal uncertainty.
By Maximilien Jazani
Attorney at Law- Managing Partner MANSWELL
© Maximilien Jazani all rights reserved