2004/76/EC: Commission Decision of 13 May 2003 on the aid scheme implemented by France for headquarters and logistics centres (notified under document number C(2003) 1483) (Text with EEA relevance)
Date: 2003-05-13
Institutions: European Commission
Subjects: France, State aid, control of State aid, exchange of information, provision of services, tax system

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 13 May 2003

on the aid scheme implemented by France for headquarters and logistics centres

(notified under document number C(2003) 1483)

(Only the French text is authentic)

(Text with EEA relevance)

(2004/76/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, and in particular
subparagraph of
Article 88(2) thereof,

the first

Having called on interested parties to submit their comments
pursuant to the provision cited above (1), and having regard to
those comments,

Whereas:

I. PROCEDURE

(1)

In 1997 the Ecofin Council adopted a Code of conduct
for business taxation (2), with a view to tackling harmful
tax competition. In line with the undertaking it gave in
connection with that Code, the Commission published
in 1998 a Notice on the application of the State aid
rules to measures relating to direct business taxation (3)
(hereinafter
its
determination to apply the
strictly and in
accordance with the principle of equality of treatment.
The present procedure has to be viewed in this context.

Notice),
rules

restating

called

the

(2)

The present procedure is concerned exclusively with the
scheme of taxation of headquarters and logistics centres

(1) OJ C 302, 27.10.2001, p. 2.
(2) OJ C 2, 6.1.1998, p. 1.
(3) OJ C 384, 10.12.1998, p. 3.

(hereinafter called the scheme) and hence does not cover
the scheme of expatriation allowances paid to members
of staff of headquarters and logistics centres posted
temporarily to France from abroad by other units of the
group concerned.

the
By letter dated 12 February 1999 (D/50716),
Commission sent a request
information on the
scheme to the French authorities. The latter furnished
the requested information by letter dated 7 May 1999
(A/33525).

for

The Commission's decision to initiate the procedure was
published in the Official
the European
Communities (4),
inviting interested parties to submit
their comments.

Journal

of

By letter dated 9 October 2001 (A/37896),
the
Commission received comments from France in reply to
the letter initiating the formal investigation procedure.

The Commission received comments from the American
Chamber of Commerce in France (A/39294). By letter
it forwarded them to France
dated 14 January 2002,
the opportunity to react. The
(D/50110)
Commission has not received any other comments on
the subject, whether from France or from any other
interested party.

to give it

(3)

(4)

(5)

(6)

(4) See footnote 1.

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II. DESCRIPTION OF THE MEASURE

Introduction (5)

(7)

(8)

tax

the

scheme

to enable

authorities'

and stated that headquarters

The scheme entered into force in 1974 and was not
notified under Article 88(3) of the Treaty. A circular of
the Directorate-General of Taxes dated 21 January 1997
set out all the administrative arrangements relating to
already
the
approved by the tax authorities could avail themselves
of the circular. The circular forms the legal basis for all
rules relating to the scheme. A second circular of the
Directorate-General of Taxes dated 11 October 2002 (6),
taking effect as from the financial year beginning on 1
January 2003, amended the 1997 circular in such a way
as
approvals of
headquarters and logistics centres to be systematically
reviewed every three
latest.
According to the circular dated 21 January 1997, the
scheme is intended to resolve the difficulties inherent in
determining transfer prices in the context of commercial
relations between headquarters and logistics centres in
France and other group companies abroad. Such pricing
is often difficult in practice because it depends on the
practical application by taxpayers and the tax authorities
of the arm's length principle laid down by the OECD.
The arm's length principle is the international standard
to determine
agreed by OECD member
transfer prices for tax purposes with a view to avoiding,
firstly, double taxation of taxable income and, secondly,
tax evasion involving the same income.

to five years at

countries

the

The scheme makes it possible to determine profits
subject
to corporation tax in an alternative manner,
using the ‘cost-plus' method. This method consists in
determining taxable profits by applying a mark-up to
the operating expenditure of
the headquarters or
logistics centre. This mark-up is determined by the tax
authorities at the taxpayer's request. The method used
the traditional methods, based on a
forms part of
comparison
with
similar
with
recommended by the
non-associated enterprises, as
OECD in its report on transfer pricing (hereinafter called
the OECD report) (7). Compared with other transaction
methods, which involve a direct comparison between
the price charged in a transaction between associated
enterprises and that charged in a transaction between

transactions

(5) Official Tax Bulletin 13 G-1-97 No 21 of 30 January 1997.
(6) Official Tax Bulletin 4 C-5-02 No 175 of 11 October 2002.
(7) ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax

Administrations', OECD, 1995.

in

situations

comparable

conditions. These

the cost-plus method is
non-associated enterprises,
based on an indirect determination of the arm's length
price. The method involves setting a mark-up on a
case-by-case basis by analogy with the mark-ups actually
charged
between
non-associated enterprises in the light of the functions
performed, the assets used, the risks assumed and the
market
in
adjustments being made to the mark-up actually charged
in comparable uncontrolled situations to make it better
suited to the peculiarities of the intra-group transactions
concerned. This mark-up is then applied to the costs
actually incurred by the same supplier of goods or
services whose taxable profits are to be calculated. The
result obtained after applying the mark-up to the above
costs is considered equivalent to the arm's length price
of these transactions between associated enterprises.

factors may

result

(9)

The OECD report also mentions the possibility for
associated enterprises to draw up prior transfer pricing
agreements with the tax authorities concerned. This
type of agreement makes it possible to determine,
in
advance of transactions between associated enterprises,
a series of appropriate criteria (including the method to
be used, the factors of comparison and the adjustments
to be made thereto) with a view to determining the
transfer price applicable to those transactions during a
given period. According to the OECD nomenclature, a
prior
transfer pricing agreement may be unilateral,
involving one tax authority and one taxpayer, or
multilateral, involving two or more tax authorities. The
agreement provides beneficiaries with an assurance that
the amount of
taxable profits determined using the
procedure will not be called into question by the
authority or authorities concerned during the lifetime of
the agreement, subject, however, to the situation of the
enterprise and the circumstances recognised by the
agreement remaining unchanged.

Scope

circular of 21 January 1997
to the
(10) According
and
circular), headquarters
(hereinafter
called the
logistics centres may take the legal
form either of
companies having their registered office in France or of
permanent establishments of
In
a
addition, headquarters may
department attached to an industrial or commercial
branch of activity of an existing enterprise or to a
holding
French
(holding
investments). On the other hand, logistics centres may
not be attached to an industrial or commercial branch

foreign companies.
form of
take

company

foreign

the

or

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principal

of activity of an existing enterprise lest there be any risk
of confusion between their own activities and those of
the
centres
constituting a branch of activity may not be attached to
a holding company, but
they may be attached to a
headquarters.

enterprise.

logistics

Lastly,

(11)

(12)

The circular stipulates that headquarters and logistics
centres must be entities liable to corporation tax in
France. Under ordinary tax law, economic entities are
liable to corporation tax where they take the form of
companies established in France or of permanent
establishments in France of foreign companies, but they
are not separately liable to tax where they are simply
branches of activity of domestic companies.

The activities of headquarters and logistics centres must
depend on an international group controlled from
France or from abroad. The circular points out that the
scheme is reserved exclusively for functions performed
If
enterprises within
on behalf of
headquarters or
to
logistics centres
enterprises outside the group, the corresponding profits
must be determined in accordance with ordinary law.
The circular states that French or foreign companies
placed under the same French or foreign control are to
be considered as belonging to one and the same group
in accordance with the conditions of ordinary tax law.

group.
supply services

the

(13) Apart from this restriction concerning the international
character of the group, the scheme is not limited to
certain specific sectors of the economy or to certain
areas of France. The circular indicates that headquarters
and logistics centres must supply services predominantly
to companies whose registered office is outside France
or to establishments of companies within the group
situated outside France. It states that this condition is
met where the total amount of current operating
expenditure corresponding to services supplied by the
headquarters or
to companies or
permanent establishments within the group situated
abroad accounts for more than half of the total amount
of current operating expenditure.

logistics

centre

(14) As regards eligible activities, both headquarters and
logistics centres may carry on a wide range of activities,
In
which are listed non-exhaustively in the circular.
general, although it
is
is only activities on which it
to place a commercial value owing to their
difficult
these activities
group-specific nature that are eligible,
consist in the supply of services being in the nature of

economic activities for the associated beneficiaries, and
correspond to:

— administrative functions such as management or

control functions, and

— the

supply of

a
preparatory or ancillary nature and not constituting
directly productive functions.

services being essentially of

(15) As regards headquarters, the circular refers, inter alia, to
administrative services and data processing services
the group;
relating to the internal administration of
human
personnel
as
management, training and the development of pay or
pay management systems; and communication or public
relations services.

resource

services

such

(16)

(17)

(18)

(19)

As regards logistics centres, the circular refers, inter alia,
to the functions of storage, packaging,
labelling or
distribution of raw materials, supplies, finished products
or goods; the administrative activities linked to these
the
functions; warehousing
packaging of raw materials, supplies, finished products
or goods; and the transport and delivery of these goods
to companies within the group.

and management

of

in view of the nature of the
The circular states that,
services supplied and the status of
the recipients of
those services, being entities not taxable in France but
belonging to the same group, headquarters and logistics
tax authorities
centres may obtain from the
an
assurance that
their profits liable to
corporation tax will not be called into question if they
determine it on the basis of one profit margin for all the
that are covered by the functions of a
activities
headquarters and logistics centre.

the amount of

Method of calculating taxable profit

The amount of taxable profit is calculated by applying
the mark-up to the amount of current operating
expenditure in accordance with the cost-plus method.
Inasmuch as the calculation method used is based on
the relevant OECD recommendations, France considers
that it makes it possible to ensure compliance with the
arm's length principle which normally prevails between
independent economic entities and that it is justified by
the nature of
the rules governing the international
taxation of cross-border profits.

tax base
In fact,
determined by the cost-plus method is considered to

according to the

circular,

the

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result

subject

result
to

reflect the profit likely to be earned under arm's length
conditions, and consequently the authorities' approval is
subject to the condition that headquarters and logistics
centres invoice their services on the basis of cost plus
the profit margin set. The circular goes on to state that
in a finding of an
any over-invoicing will
additional
in
corporation
accordance with ordinary tax law. Any under-invoicing
will constitute a hidden advantage for headquarters and
logistics centres and a presumed distribution of income
to the beneficiaries which would lead to the application
of distribution tax. Otherwise, the method of fixing the
taxable profit applied by the scheme has no impact on
the taxation of financial products not involving pursuit
of the activities of headquarters and logistics centres,
such as the income from securities and the capital gains
or losses resulting from the sale of fixed assets.

tax

(20) According to the circular, the mark-up will be set on a
case-by-case basis separately for headquarters and for
logistics centres and in the light of the characteristics of
the particular activity and of the context in which it is
the level which best corresponds to the
pursued, at
profit which would have been achieved by
an
independent enterprise under arm's length conditions. In
particular,
the activities
carried on are purely administrative and higher if the
activities are strategic in nature. The tax authorities can
take account, in setting the mark-up, of the nature of
the jobs needed to perform the tasks of headquarters
and logistics centres. The employment of highly skilled
staff will give rise to the application of a higher
mark-up than the employment of low-skilled staff.

the mark-up will be low if

(21)

The mark-up set is not cast in stone for the lifetime of
headquarters and logistics centres but may be modified
in the light of changes in the nature or context of the
activities which the beneficiary is required to declare to
the tax authorities as from the financial year in which
the changes occur. According to the circular of 11
October 2002, and as
the
mark-up must be determined afresh as part of a
systematic review of the approval every three to five
years.

from 1 January 2003,

(22) According to the circular, the operating expenditure that
is taken into account in calculating the taxable profit is
determined in accordance with the ordinary law rules
on corporation tax. This expenditure corresponds to the
miscellaneous expenses incurred during the financial
year as registered on the debit side of the taxpayer's
revenue and expenditure accounts, and includes interest
operating
and
payments
expenditure does not include:

amortisation. However,

of

II-2

the General

— disbursements which are reimbursed to headquarters
and logistics centres under the conditions laid down
by the ordinary law scheme provided for in Article
267
Such
disbursements must be occasional and incidental in
nature and must not come within the traditional
area of activity of headquarters and logistics centres.
They are regarded as incidental if the amount does
not exceed 10 % of current operating expenditure
excluding disbursements. Above this percentage,
disbursements are included in expenditure,

Tax Code.

— subcontracted

that

provided

activities,

the
expenditure in respect of these activities represents
less than half of the operating expenditure excluding
subcontracting. From an example given in the
circular, the Commission has learnt that, where this
exclusion from the tax base is applicable, that part
of the subcontracting expenditure which does not
exceed half of the operating expenditure excluding
subcontracting is deducted from the base subject to
the mark-up. The
application of
inclusion of
for
expenditure
subcontracting
calculating taxable profits is therefore limited to the
part
operating
expenditure excluding subcontracting.

50 % of

exceeding

current

basis

the

in

Annual flat-rate tax

(23) As regards the annual flat-rate tax (imposition forfaitaire
annuelle — IFA), headquarters and logistics centres are
taxable only on the amount
laid down for the first
bracket of the IFA scale fixed by Article 223 septies of
the General Tax Code. The amount of the IFA depends
on the amount of turnover plus financial income. The
first tax bracket is EUR 750 and relates to turnover plus
financial
income between EUR 76 000 and EUR
150 000. The last IFA tax bracket is EUR 30 000 and
relates to turnover plus financial
income greater than
EUR 75 million. The IFA tax brackets between EUR 750
and EUR 30 000 are not applicable to beneficiaries
under the scheme.

(24)

towards one of

The IFA must be paid to the State by 15 March of the
financial year in question. The payment is therefore only
the payments
a part payment
subsequently due for the current year or the following
two years (8). Consequently, an exemption from the IFA
which is not set against corporation tax for the three
consecutive years is equivalent to total exemption from
the IFA for a
the tax. Exemption from payment of

(8) If, for example, a company paid the IFA on 15 March 2003, it may
set this sum against one of the part payments or the balance due in
the tax becomes
either 2003, 2004 or 2005. After that date,
definitively due to the Treasury.

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shorter period, because
three-year period exceeds
constitutes a mere tax deferral.

the

the

tax due during the
IFA part payment,

(29)

III. GROUNDS FOR INITIATING THE PROCEDURE

(25)

investigation procedure (9), the
In opening the formal
the measure might
Commission considered
constitute State aid as it seemed to meet
the four
cumulative criteria under Article 87(1) of the Treaty. In
particular, the Commission identified the following three
potential aid elements:

that

the

that

costs

fact
and

subcontracting

subcontracting

relating
expenditure

to
the
secondly,
disbursements
are
partially taken into account in the basis for applying the
cost-plus method is
in keeping with the strictest
application of
the OECD rules on transfer pricing,
which requires even the total exclusion of such costs,
notably where the international intra-group transactions
concerned take the form of supplies of services. As far
the
as
concerned,
expenditure
American Chamber of Commerce considers that
the
inclusion of such expenditure in the basis for applying
the cost-plus margin does not correspond to economic
reality for an intermediary in France. Such inclusion
would give rise to problems of tax deductibility for the
group company benefiting from the service in view of
a margin to the
the unjustified
subcontracting expenditure potentially deductible by the
latter;

application of

is

— firstly, certain costs borne by headquarters and
logistics centres are not
in
calculating taxable profit according to the cost-plus
method,

taken into account

(30)

— secondly, the partial exemption from the IFA from
which headquarters and logistics centres benefit
seems to result in lower taxation than under the
ordinary law,

thirdly, the American Chamber of Commerce considers
that the IFA is not a definitive tax as it is credited
towards the corporation tax due during the two years
following application of the IFA. Where this latter tax
base, once the 33 1/3 % corporation tax rate is applied,
determines a result greater than EUR 750, an entity
benefiting from the scheme is obliged to pay the higher
definitive tax and hence this IFA ceiling will have no
impact. The IFA ceiling provided by the scheme does
not therefore have a decisive impact as an advantage;

— thirdly,

the authorities'

room for manoeuvre in
setting the mark-up applicable in the cost-plus
method may favour certain enterprises or groups.

(31)

(26)

its preliminary assessment,

Lastly, as part of
the
Commission considered that none of the derogations in
Article 87(2) and (3) of
the Treaty applied to the
scheme.

(27)

(28)

IV. COMMENTS FROM INTERESTED PARTIES

The American Chamber of Commerce
in France
(hereinafter called the American Chamber of Commerce)
considers that the scheme does not confer any financial
advantage on beneficiaries and that, for the following
reasons, it cannot constitute aid:

the only advantage that

firstly, the American Chamber of Commerce considers
that
the scheme confers on
beneficiaries is that of enabling them to have prior
knowledge of the method for determining the applicable
taxable income. Consequently, the scheme is akin to a
unilateral prior transfer pricing agreement between the
taxpayer
constituting an
administrative practice encouraged by the OECD;

tax authorities,

and the

(9) See footnote 1.

and

and

centres

lastly, the American Chamber of Commerce considers
that the French tax authorities are particularly rigorous
and strict when it comes to negotiating and determining
the mark-up applicable to operations carried out by
headquarters
that,
logistics
consequently, no advantage lies in the methods of
setting the mark-up involved in applying the cost-plus
method.
the American Chamber of
Commerce confirms the application of paragraph 36 of
the circular, according to which ‘the mark-up shall be
the
set on a
characteristics of the headquarter's activity and of the
context in which it is pursued, at the level which best
corresponds to the profit that would have been achieved
length
by an independent
conditions'.

case-by-case basis

enterprise under

In particular,

light of

in the

arm's

(32) At all events,

the American Chamber of Commerce
points to the legitimate expectation of its members, who
have benefited from the
certain
knowledge that the transfer prices charged corresponded
to arm's length prices.

in the

scheme

V. COMMENTS FROM FRANCE

(33)

In its comments, France challenges the categorisation of
the headquarters and logistics centres scheme as aid,
arguing that it fulfils none of the four criteria in Article
87(1) of the Treaty.

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Absence of an advantage

(34)

to

that

acting

entities

applicable

France considers that the correspondence between the
taxation applied to headquarters and logistics centres
and
entirely
independently excludes the presence of any advantage. It
must be borne in mind that the arm's length principle
has to be applied in situations involving international
transactions between associated enterprises, and that it
is therefore this principle that is the general rule for
determining whether the taxable profits of a firm acting
calculated more
in the
the method
advantageously.
applied
of
headquarters and logistics centres corresponds to that
which, according to the OECD, makes it possible to
the OECD
obtain the arm's length price. Moreover,
considers
the most
cost-plus method to be
appropriate where the controlled transactions taken into
account are supplies of services.

intra-group context
France
determining

are
considers
the

that
taxable

profits

the

for

(35) As

the

and

regards

incidental

from the

in nature,

expenditure

exclusion of

subcontracting expenditure

disbursements
basis

logistics centre. The difference

and
subcontracting
for
calculating taxable profits, France observes that, in order
to be excluded from this basis, such costs must be
occasional
i.e. wholly
independent of the exercise of the normal functions of a
in
headquarters or
threshold for
(50 % of
current operating expenditure excluding subcontracting)
compared with disbursements
(10 % of operating
expenditure excluding disbursements) is justified by the
need to make the scheme reflect economic reality as
closely as possible and to distinguish between the
activities of headquarters or logistics centres and those
of
intermediaries
(subcontracting). With regard more particularly to
subcontracting expenditure, France considers that, if the
scheme had followed the OECD's recommendations on
application of the cost-plus method to the activities of
agent or
it might have been more
advantageous. The OECD advocates either the exclusion,
without any ceiling, of subcontracting expenditure from
the tax base, or the application of a lower rate to such
expenditure and to that part of the current operating
related thereto. According to
expenditure which is
is less
the solution adopted by the circular
France,
favourable than that advocated by the OECD in its
determination of the arm's length price, and therefore
the French measure cannot constitute an advantage.

(disbursements)

intermediary,

agents

or

(36) As

regards

the setting of

the mark-up permitting
application of the cost-plus method, according to France
it is effectively determined on a case-by-case basis and is
adjustable every three to five years at
the most.
However, the authorities do not enjoy any room for
manoeuvre capable of
favouring certain enterprises
owing to the fact that the setting of the rate is actually
carried out in general on a case-by-case basis in the

light of changes in the nature or context of the pursuit
of the activities and as from the financial year in which
those changes occur. Moreover, as a result of
the
mark-up being set on a case-by-case basis, the taxation
of headquarters and logistics centres in fact more closely
the
resembles that deriving from the application of
arm's length principle, which is the standard applicable
to all intra-group transactions.

(37) As regards the limitation of the IFA to the first bracket
of the scale fixed by Article 223 septies of the General
Tax Code, France considers that this limitation confers
no advantage as the IFA is no more than an advance on
the corporation tax owed by beneficiaries and is
ultimately borne by enterprises only if
they are in
deficit, a situation which would not arise in the case of
headquarters and logistics centres. These are in principle
always
the
corporation
application of
the cost-plus method, which makes it
possible to determine their taxable profits as a surplus
on top of their gross operating expenditure. Application
of the advances system constituted by the IFA represents
at the most an advance payment which, for ordinary
companies, is larger than for headquarters and logistics
centres. In view of the fact that the maximum amount
of the IFA is EUR 30 000, any cash flow advantage
stemming from exemption from the IFA is negligible.

through

subject

tax

to

(38) As regards the fact that application of

this cannot,

the cost-plus
method enables taxpayers to know in advance how
much tax they owe and to avoid any disputes with the
tax authorities,
in France's opinion, be
considered an advantage because disputes are avoided
only if the conditions of the cost-plus method are met
and hence if the tax base of headquarters and logistics
centres is determined in accordance with the arm's
length principle. Therefore, according to France, if the
this principle constitutes an advantage
application of
compared with the analytical determination of the tax
base as provided for under
that
advantage is justified by the nature and general scheme
of the French tax system, complying as it does with the
OECD's
regarding the taxation of
supplies of services between controlled enterprises. In
fact, the scheme promotes the removal of uncertainty in
the application of corporation tax in an international
in accordance with the OECD's
intra-group context
recommendations on the conclusion of prior transfer
pricing agreements.

the ordinary law,

recommendations

Absence of State resources

(39) According to France, the scheme merely safeguards the
resources of the State as the alternative method which is

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applied makes it possible to effectively tax activities
which would otherwise be
completely missed by
corporation tax in France. It is thanks to this scheme
that France obtains tax revenues from certain activities
which, in France's view, are not normally likely to give
rise to marketing to third parties and hence are not
determinable in any way.

removed the doubts
interested parties have not
expressed.
It accordingly takes the view that certain
aspects of the tax scheme scrutinised constitute unlawful
operating aid which is incompatible with the common
market.

Absence of effect on competition and trade

Advantage

(40)

likely to affect
the scheme is not
In France's view,
competition and intra-Community trade as the services
which benefit
from the measure are, by definition,
‘non-externalisable' and hence extra-market. With regard
more particularly to logistics centres, France considers
that their activities do not add any value to the products
they serve.

(44)

Absence of selectivity

(41)

(42)

at

Lastly, in France's view, the scheme is not selective as it
is a general tax policy measure open to all economic
sectors and all
international groups controlled from
both France and abroad. The fact that the scheme is
is
directed exclusively
justified because these operations alone are faced with
the problem of transfer prices and the risk of double
taxation. In fact, the measure is not selective because the
special determination of prices between associated
enterprises covered by the scheme has no fiscal impact
for other enterprises which do not do business at the
international level.

international operations

Lastly, the measure is open to all economic operators
form,
supplying,
international
intra-group
to production and
marketing activities and is therefore not selective.

in whatever
services

legal
ancillary

(45)

VI. ASSESSMENT OF THE MEASURE

Introduction

(43) After considering the comments from France and from
the interested parties, the Commission adheres to the
position it took in its letter of 11 July 2001 (10) opening
the formal investigation procedure. It considers that the
and the other
observations

submitted by France

(10) See footnote 1.

accruing profits

France and the interested parties invoke the absence of
any advantage linked to recourse to a flat-rate taxation
method based on determination of the taxable profit in
accordance with the arm's length principle. Where, in a
multinational context characterised by differences in the
actual
level of taxation between the various countries
concerned, associated enterprises carry out transactions
with one another, their commercial relations and hence
their
to
are
manipulation by the taxpayer because they involve the
same economic interest. Consequently, the national tax
the
authorities
taxable profits of these taxpayers and hence determine a
heavier taxation or a double taxation of the relevant
transactions. In France's view, inasmuch as the aim of
having recourse to the cost-plus method is to eliminate
double taxation,
the scheme does not confer any
advantage.

concerned may unilaterally correct

theoretically

liable

between

transactions

international

It should be pointed out first of all that the French tax
system does in fact comply with the arm's length
principle as regards the determination of taxable profits
in
controlled
enterprises, both at the level of domestic law, under
Article 57 of the General Tax Code, and at that of the
bilateral double taxation treaties concluded by France
with its partner countries. In particular, Article 57 of
the General Tax Code provides for a tax adjustment
procedure ‘to establish the income tax payable by
enterprises which are dependent on or which control
situated outside France' with regard to
enterprises
‘profits indirectly transferred to the latter, either by
increasing or by reducing purchase or selling prices or
by any other means'. In this case, profits which do not
comply with the arm's
‘shall be
included in the results as shown in the accounts' of the
French enterprises concerned. Article 57 also specifies
that, in the absence of specific evidence to support such
adjustment,
shall be determined by
comparison with those of similar, normally operated
enterprises'. The double taxation treaties concluded by
France make it possible,
to make
comparable adjustments as regards the profits accruing
in commercial
relations between related enterprises
established in the contracting States, in accordance with
the arm's length principle set forth in Article 9 of the

length principle

‘taxable profits

their part,

for

L 23/8

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28.1.2004

OECD Model Convention. The Commission would point
out in this connection that the cost-plus method used to
determine the taxable profits of headquarters and
logistics centres forms part of the traditional methods
listed by the OECD in its report on transfer pricing.

(46)

(47)

is

that

the nature of

The Commission considers
the
services supplied by headquarters and logistics centres
makes it difficult
to determine directly their taxable
profits in France and that the application of an indirect
method of determining taxable profits
therefore
justified. This method takes the form of an estimate
involving the setting of the gross profit margin which
one of the parties to a transaction between associated
enterprises has sought by way of payment and which
the other party has considered acceptable under arm's
length conditions for the performance of comparable
functions. Moreover, the determination of the mark-up
within the framework of the application of the cost-plus
method, via a prior agreement valid for a whole series
of
indeterminate economic transactions, constitutes a
method of applying the arm's length principle strongly
encouraged
the
Commission confirms its position according to which it
has no objections of principle either to the cost-plus
method or to the prior agreements for the setting of the
mark-up relating to intra-group transactions used by
France in the scheme under scrutiny.

the OECD.

conclusion,

by

In

The Commission notes, moreover, that neither France
nor the other interested parties contest the fact that the
taxable profits accruing to headquarters and logistics
centres are not actual but simply estimated. Lastly, the
possibility of obtaining prior
from the
authorities covering the rate of return on an indefinite
and potentially large number of transactions constitutes
analytical
treatment
special
the
determination of profits.
is therefore necessary to
It
examine in detail the specific application by France of
this method of taxation.

compared with

approval

Setting of the mark-up

(48) As regards the setting of

the mark-up,

it should be
pointed out that, according to the circular, the scheme
concerns only ‘activities on which it
is in practice
extremely difficult to place a commercial value owing to
their group-specific nature' (11). In fact, the activities to
which the circular refers concern functions which are
‘essentially of a preparatory or ancillary character and

which do not therefore constitute directly productive
functions' (12). On the other hand,
the Commission
considers that the activities to which the circular refers
are very varied and may well have a fairly considerable
commercial value. By way of example, reference may be
made to ‘strategic services' or ‘research and development
services', as mentioned in the circular. In particular, it
should be pointed out that these services constitute not
only economic activities but also commercial activities
which potentially account for a significant fraction of
the overall added value produced by a multinational
group.
certain activities of
headquarters and logistics centres may be subcontracted
bears witness
those
operations.

to the commercial nature of

Lastly,

that

fact

the

(49)

(50)

or

for

these

research

strategic

The Commission considers that the application of the
cost-plus method and the prior setting of the rate of
return for all the activities carried on by a headquarters
and
responsible
development services for a period of three-five years
may give rise to a different calculation from that
resulting from an analytical determination. It takes the
view, that, for want of other methods, this differential
treatment is necessary in order to determine the transfer
price for
transactions between associated enterprises
where a direct estimation of the price compared with
that
between
independent enterprises would be inappropriate. This
method is therefore justified by the nature of the French
tax system within the meaning of point 23 of
the
Notice.

transactions

charged

similar

in

case-by-case basis by reference

therefore support a finding that

The Commission must also verify whether the methods
of determining the margin are such as to leave the tax
authorities a degree of discretion. In the light of the
comments
submitted by France and the interested
parties, it would appear that the mark-up is effectively
to the
set on a
characteristics of the activities actually carried on by the
taxpayer and of the context in which they are carried
on. The evidence in the Commission's possession does
not
the authorities'
room for manoeuvre in setting the mark-up usable in
the cost-plus method may have been used to favour
certain enterprises or groups. Lastly, the Commission
takes note of the amendment to the circular, introduced
after the formal
investigation procedure was opened,
providing for a systematic review, at the latest every
three to five years, of agreements in the light of changes
in the
activities of
headquarters and logistics centres are carried on. It must
therefore be concluded that the determination of the
mark-up under
any
advantage on headquarters and logistics centres or on
the groups to which they belong.

conditions under which the

scheme does not

confer

the

(11) See paragraph 13 of the circular.

(12) See paragraph 56 of the circular.

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Official Journal of the European Union

L 23/9

Disbursements and subcontracted activities

that

(51) With regard to the non-inclusion of disbursements in
the cost-plus method, the Commission considers that,
while these activities may in fact be of an occasional
and ancillary nature,
they are nevertheless significant
owing to the fact that the ceiling of 10 % of current
operating expenditure
excluding disbursements may
correspond to substantial amounts. It takes the view,
however,
the decisive factor when it comes to
eliminating any supposition of advantage is the fact that,
in order to be excluded from the expenditure base for
the cost-plus method, and hence from the tax base,
disbursements must fulfil the common conditions set
out in Article 267 II-2 of the General Tax Code. That
article excludes from the tax base for corporation tax
purposes ‘sums reimbursed to intermediaries … who
carry out expenditure in the name and on behalf of
their principals in so far as those intermediaries are
answerable to their principals, enter the expenditure in
suspense accounts and provide the tax authorities with
proof of
the
expenditure'. The fact that the scheme under scrutiny
and the ordinary law rule are the same makes it
possible to rule out the existence of an advantage over
the arrangements for the analytical determination of
taxable profits. In the latter case, activities relating to
disbursements would not give rise to any taxable profits.

amount of

the nature

and exact

(52) With regard to the exclusion of subcontracted activities
from the method for calculating taxable profits under
the conditions referred to above,
it should be pointed
out that the OECD transfer pricing principles advocate,
in such cases involving application of
the cost-plus
method, either applying a margin only to the costs
inherent
in the exercise of the function of agent or
intermediary or reducing the mark-up to be applied to
all the costs of the services. Although in this connection
the OECD report gives an example whereby it
is
considered appropriate for an associated enterprise
which bears costs on behalf of another associated
enterprise to pass on these costs to the latter without
applying a margin, this example does not prevent the
Commission from remarking that, in such situations, it
must be ensured that all the advantages enjoyed by the
beneficiary are correctly taken into account so as to
make the determination of the taxable profit comply
with the arm's length principle.

(53)

It must be concluded that France applies systematically
the exclusion of expenditure relating to subcontracting
activities without evaluating on a case-by-case basis
whether it might not be appropriate to apply a specific
mark-up to the activity of intermediary or whether an
alternative solution involving reducing the mark-up for

a

taxable

produces

all the activities might be envisaged. If, on the one hand,
reducing the mark-up determines lower taxable profits,
on the other hand, extending the basis for applying the
mark-up
profit. The
larger
Commission finds that the exclusion of subcontracting
expenditure cannot be justified in so far as, beyond the
limit of 50 % of
the total excluding subcontracting
expenditure, subcontracting activities are again taken
into consideration in the calculation of the tax base.
Lastly,
the ceiling of
50 % of total expenditure excluding subcontracting may
represent a considerable amount of
revenue which
systematically escapes taxation.

the Commission considers that

(54) As indicated in point 9 of the Notice, the advantage
may be provided through a reduction in the tax burden.
The Commission would observe that not all costs borne
by headquarters and logistics centres are taken into
account in calculating taxable profit according to the
cost-plus method. This exclusion is liable to constitute a
reduction in the tax burden within the meaning of point
9 of the Notice.

IFA

tax

(55) With regard to the exemption from the annual flat-rate
tax (IFA) forming part of the scheme, the Commission
agrees with France's argument that any advantage would
be limited to situations in which headquarters and
logistics centres do not generate tax amounting to more
than EUR 30 000. Although it is difficult to assess the
impact of the limited application of the IFA (exclusively
to its first bracket)
in a system such as that of the
revenue
scrutiny, which fixes
scheme under
presumptively, this does not prevent the Commission
from observing that beneficiaries'
turnover can be
determined autonomously and objectively in relation to
the eligible expenditure of headquarters and logistics
centres. The partial exemption from the IFA granted by
the
France
acknowledges, an advantage which may take the form of
a tax deferment. The IFA paid is deductible from
corporation tax and headquarters and logistics centres
are still liable for that tax as use of the cost-plus method
still implies the existence of a taxable profit. However,
where the IFA avoided under the scheme is higher than
the amount paid by way of corporation tax,
this
difference during the course of a tax year involves a tax
deferment.
In addition, and as already indicated in
recital 23, the Commission cannot rule out that the
partial exemption from the IFA may constitute a
definitive tax exemption where such tax deferment is
repeated during three consecutive years.

constitutes,

therefore

scheme

as

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Official Journal of the European Union

28.1.2004

(56)

The fact that the amounts in question are modest does
not suffice to rule out the existence of an advantage
within the meaning of Article 87(1) of
the Treaty.
France has not furnished any evidence to show that the
conditions of application of the de minimis rule as laid
down by Commission Regulation (EC) No 69/2001 on
the application of Articles 87 and 88 of the EC Treaty
to de minimis aid (13) are complied with in the present
case, notably as regards the sectors excluded from that
rule and the limits on cumulation.

Conclusions on the advantage

(57)

It must be concluded from the above that both the
non-inclusion of subcontracting expenditure and the
for
exemption from the IFA constitute advantages
beneficiary enterprises and the groups to which they
belong.

firms

aid strengthens the firm's position compared with that
which
of
in
other
intra-Community
enough to allow the
is
conclusion to be drawn that intra-Community trade is
affected'.

competitors

trade

are

(62)

Lastly, the fact that the scheme in question applies in a
multinational context is a strong indication that it may
influence inter-State economic activities and therefore
distort competition at European level.

Selectivity and justification by the nature or general
scheme of the system

State resources

(63) According to France, the scheme is not selective as it is
tax policy measure open to all economic

a general
sectors, all geographic areas and all legal forms.

(64)

(65)

(66)

(58)

(59)

(60)

In the present case, the reduction in the amount of tax,
whether it stems from a reduction in the tax base or
from a reduction in the amount of the IFA, leads to a
reduction in tax revenue, which is a State resource.

France's argument that tax revenue is increased as a
result of the scheme is immaterial as, in its assessment,
the Commission must refer exclusively to the resources
from which the State would benefit if the taxation of
headquarters and logistics centres were determined
under the conditions of ordinary law.

Effect on competition and trade between Member
States

Since the scheme is a scheme of direct taxation which is
in principle open to all sectors of activity connected
with production and commerce, the Commission cannot
rule out
that some beneficiary enterprises and the
groups to which they belong may be active in sectors
where intra-Community trade is intense. The possibility
of an effect on trade through the application of this
flat-rate tax scheme cannot be excluded.

(61)

Secondly, in accordance with the case-law of the Court
the European Communities (14) and as
of
stated in point 11 of the Notice, ‘The mere fact that the

Justice of

(13) OJ L 10, 13.1.2001, p. 30.
(14) Case 730/79 Philip Morris Holland BV v Commission [1980] ECR

2671.

The Commission does not dispute that the scheme is
open to all sectors of the economy irrespective of their
geographic location or legal form, but it considers none
the
the less that
selective character of the measure.

this does not suffice to rule out

Firstly, the measure is limited to supplies of services
which correspond to the functions of management,
administration, coordination or control and to activities
preparatory or ancillary to productive or commercial
functions performed in the context of an international
group. Directly productive or commercial activities and
activities not
context of an
international group are therefore excluded. Only the
former activities are therefore capable of benefiting from
the advantages identified.

taking place

in the

do

not

their

provide

Secondly, the benefit of the scheme is limited exclusively
to headquarters and logistics centres which provide their
services predominantly to associated companies situated
outside France. The Commission would observe that
services
entities which
predominantly to associated companies located outside
France are excluded from the benefit of the measure.
This predominance condition must be viewed in the
light of the ratio between the total amount of current
services
operating
supplied by the entities in question to group companies
whose registered office is situated outside France or to
permanent establishments of group companies situated
current
amount of
outside
services
operating expenditure corresponding to all

corresponding

expenditure

and the

France

total

to

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Official Journal of the European Union

L 23/11

supplied to all beneficiaries whether established or not
in France. Thus, entities established in France but not
satisfying the predominance condition cannot benefit
from the advantages of the scheme despite the fact that
transactions with associated companies or
in their
face the same
situated abroad they must
branches
difficulties as headquarters and logistics centres
in
determining their taxable profits.

the

represented by the
advantages
the Treaty as
exclusion of certain expenditure from the basis for
calculating taxable profits and the partial exemption
from the IFA scheme are not justified by the nature or
general scheme of the French tax system.

Compatibility

(67)

that

the fact

excluded from the

Lastly,
logistics centres constituting a
department attached to an industrial or commercial
branch of activity of an existing enterprise or to a
scheme
holding company are
strengthens the selectivity of the measure. France has
not presented any arguments in this connection in the
course of the procedure. The circular states that this
limitation is motivated by the need to avoid any
confusion with other activities of the group. However, it
is not stated why this limitation does not apply to
headquarters.

to what

operations

(68) As regards the possible justification for the differential
nature of the scheme, the French authorities have not
furnished, as required by point 23 of the Notice, any
information explaining
extent operations
carried out by headquarters and logistics centres deserve
more favourable tax treatment than entities carrying out
the
the
same
than
abovementioned
logistics centres not attached to an enterprise in France
or to a holding company. In the present case, it does
not appear that the economic rationale of the measure
makes it necessary to the functioning and effectiveness
of the tax system (15). The measure must therefore be
deemed not to be justified by the nature or general
scheme of the system, and the Commission confirms its
preliminary position on the selective character of the
measure.

satisfying
or

predominance

criterion

not

but

(71) As

stated in the decision to open the

formal
the scheme in question does
investigation procedure,
not
the
to qualify for
seem prima
facie
derogations laid down in Article 87(2) and (3) of the
Treaty.
the
French authorities nor
the interested third parties
presented any arguments as to a possible compatibility
of
common market. The
Commission's doubts have therefore been confirmed.

the procedure, neither

scheme with the

In the course of

any of

the

(72)

The derogations in Article 87(2) of the Treaty, which
concern aid of a social character granted to individual
consumers, aid to make good the damage caused by
natural disasters or exceptional occurrences and aid
granted to certain areas of
the Federal Republic of
Germany, do not apply in this case.

(73) Nor does the derogation in Article 87(3)(a) of

the
Treaty, which provides for the authorisation of aid to
promote the economic development of areas where the
standard of living is abnormally low or where there is
serious underemployment, apply, as
the scheme in
question has unlimited territorial scope.

(74)

(75)

(69)

that
The Commission would
subcontracting activities receive different tax treatment
above a certain ceiling, which confers a selective
character on this differentiated treatment.

lastly,

point

out,

Conclusions on the existence of aid

(70)

the measure in question
It must be concluded that
constitutes aid within the meaning of Article 87(1) of

Similarly, the scheme does not fall into the category of
projects of common European interest eligible for the
derogation in Article 87(3)(b) of the Treaty, and in so
far as it does not seek to promote culture and heritage
conservation it cannot qualify for the derogation in
Article 87(3)(d) of the Treaty.

to

aid

authorises

The tax advantages granted under the scheme do not
the
qualify for the derogation in Article 87(3)(c) of
Treaty, which
the
development of certain economic activities or of certain
economic areas, where such aid does not adversely
affect trading conditions to an extent that is contrary to
the common interest. They amount to operating aid
which relieves the beneficiary companies or groups to
which they belong of charges that should normally be
borne by them.

facilitate

(15) See Commission Decision 96/369/EC of 13 March 1996
concerning fiscal aid given to German airlines in the form of a
depreciation facility (OJ L 146, 20.6.1996, p. 42).

(76)

that
It must be concluded,
incompatible with the common market.

therefore,

the scheme is

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Official Journal of the European Union

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Recovery

(77)

The measure in question has been implemented without
ever having been notified to the Commission in
accordance with Article 88(3) of the Treaty;
it is not
covered by prescription and it constituted aid as soon as
it came into force. It therefore constitutes illegal aid.

(81)

(78) Where

illegally granted State aid is

found to be
incompatible with the common market,
the natural
consequence of such a finding is that the aid should be
recovered from the recipients in accordance with Article
14 of Council Regulation (EC) No 659/1999 of 22
March 1999 laying down detailed rules
the
application of Article 93 of the EC Treaty (16). Through
recovery of the aid, the competitive position that existed
before the aid was granted is restored as far as is
possible. Neither the lack of any precedent involving the
application of the State aid rules in similar cases nor the
alleged lack of clarity of Community policy on State aid
justifies a departure from this basic principle.

for

justifying,

follows from the case-law of the Court of Justice (18)
that the Commission must take into account exceptional
circumstances
in accordance with Article
14(1) of Regulation (EC) No 659/1999, non-recovery of
aid illegally granted where recovery would be contrary
to a general principle of Community law such as respect
for the recipients' legitimate expectations.

two

schemes

the Commission notes that

In the present case,
the
French scheme presents certain similarities with the
system introduced in Belgium by Royal Decree No 187
of 30 December 1982 concerning the taxation of
concern
coordination centres. The
intra-group activities and lay down specific rules for
determining the tax base. In its Decision SG(84) D/6421
of 16 May 1984, the Commission took the view that the
scheme did not give rise to aid within the meaning of
Article 92(1) of the Treaty. Even though the decision
has not been published, the fact that the Commission
did not raise any objection to the Belgian scheme for
coordination centres was made public at the time in the
Fourteenth Report on Competition Policy and in an
answer to a Parliamentary question (19).

the Court of

(79) Nevertheless, Article 14(1) of Regulation (EC) No
659/1999 provides
‘the Commission shall not
that
require the recovery of the aid if this would be contrary
to a general principle of Community law'. The case-law
Justice and the Commission's own
of
decision-making practice have established that where, as
a result of
the Commission's actions, a legitimate
expectation exists on the part of the beneficiary of a
measure that the aid has been granted in accordance
with Community law, then an order to recover the aid
would infringe a general principle of Community law.

(82) Under the circumstances, the Commission notes that its
decision on the Belgian scheme for coordination centres
was adopted before the French scheme was adopted in
its present form as set out in the circulars of 21 January
1997
the
Commission concludes that the beneficiaries under the
scheme had a legitimate expectation that the aid would
not be recovered and hence is not requiring recovery.

2002. Accordingly,

11 October

and

(80)

In its judgment in Van den Bergh en Jurgens (17), the
Court ruled:

VII. CONCLUSIONS

‘The Court has consistently held that any trader in
regard to whom an Institution has given rise to justified
hopes may rely on the principle of protection of
legitimate expectation. On the other hand, if a prudent
and discriminating trader could have foreseen the
adoption of a Community measure likely to affect his
interests, he cannot plead that principle if the measure
is adopted.'

invoked the

existence of a legitimate
France has
expectation on the part of
the
the beneficiaries of
scheme without submitting to the Commission any
specific argument concerning this approach. However, it

(83)

The Commission finds that certain aspects of the French
scheme constitute State aid within the meaning of
Article 87(1) of
the Treaty and that France has
unlawfully implemented the aid in breach of Article
88(3) of the Treaty.

(84) Nevertheless,

the position that

the Commission has
taken in the past with regard to certain tax measures for
multinationals may have given rise, on the part of the
beneficiaries under
legitimate
expectation that the scheme did not constitute State aid.
The Commission finds that recovery of the aid would

scheme,

to the

the

(16) OJ L 83, 27.3.1999, p. 1.
(17) Case C-265/85 Van den Bergh en Jurgens BV v Commission

(18) Case 223/85 RSV v Commission [1987] ECR 4617.
(19) See answer to Written Question No 1735/90 (OJ C 63, 11.3.1991,

[1987] ECR 1155, paragraph 44.

p. 37).

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to the general principle of respect

for
run counter
legitimate expectation and, accordingly, has decided not
to require recovery of the aid,

(a)

the arrangements for applying the cost-plus method as
regards the exclusion of certain subcontracting expenditure
from the basis for calculating taxable profit;

HAS ADOPTED THIS DECISION:

Article 1

the

expenditure

exclusion of

subcontracting

from the
The
calculation of the tax base and the application limited to the
first bracket of
tax
implemented by France within the framework of the circular of
21 January 1997 of
the Directorate-General of Taxes
scheme
concerning the headquarters and logistics centres
constitute State aid which is illegal and incompatible with the
common market.

scale of

flat-rate

annual

the

(b) the arrangements for partial exemption from the IFA.

Article 3

France shall
inform the Commission, within two months of
notification of this Decision, of the measures taken to comply
with it.

Article 4

This Decision is addressed to the French Republic.

Article 2

Done at Brussels, 13 May 2003.

France is required to abolish, with effect from the tax period
following that under way on the date of notification of this
Decision, the following aid elements governed by the circular
referred to in Article 1:

For the Commission

Mario MONTI

Member of the Commission