France Tax Alert: Supreme Court rules conversion of distributor to commissionaire does not create PE in France

The Supreme Court has ruled in the Zimmer Ltd case that, under French law, a company that acts under a commissionaire arrangement cannot be regarded as a dependent agent with authority to bind its foreign principal and, therefore, cannot create a permanent establishment (PE) of the principal in France, regardless of the fact that the commissionaire is dependent on the principal. The decision, issued on 31 March 2010, overrules a 2007 decision of the Administrative Court of Paris that had created considerable uncertainty for many multinationals that had organized their distribution operations under these types of agreements.


The case involved a U.K. company, Zimmer Ltd, which manufactures orthopedic products. Zimmer Ltd previously sold its products in France under a distribution agreement with its French subsidiary, Zimmer SAS. In 1995, Zimmer SAS was converted from a distributor to a commissionaire, acting in its own name but on behalf of the principal (Zimmer Ltd). Zimmer SAS had the ability and authority to accept orders from clients, present quotes and documentation in bid processes, negotiate price discounts and agree on payment conditions.

No prior authorization from the principal was required for these activities. Zimmer SAS did not engage in any activities other than selling Zimmer Ltd's products under the commissionaire agreement.

The French tax authorities assessed Zimmer Ltd to French corporate income tax on the grounds that it had a permanent establishment in France since it was carrying out a business in France through a dependent agent.

On 2 February 2007, the Administrative Court of Paris confirmed the assessment made by the French tax authorities and ruled that, in some circumstances, a commissionaire may be viewed as creating a permanent establishment in France of a foreign principal. The court held that Zimmer Ltd had a PE because Zimmer SAS was not an independent agent, but was acting under the instructions and control of Zimmer Ltd for all sales and marketing activities. The fact that Zimmer SAS was acting as a commissionaire and, therefore, in its own name and not in the name of the principal when dealing with clients did not prevent the court from reaching this conclusion. Under the commissionaire agreement, Zimmer SAS had the ability to bind Zimmer Ltd in a commercial relationship; it was permitted by contract to accept orders from clients, negotiate prices and conclude sales contracts on Zimmer Ltd's account without the prior approval of the U.K. company. The court also based its decision on the fact that under the agreement Zimmer Ltd assumed all the risks associated with the distribution activities and that Zimmer SAS's sole and exclusive activity consisted of distributing Zimmer Ltd products under the commissionaire agreement.

Supreme Court decision

The Supreme Court based its decision on a pure legal analysis of the provisions of the French Commercial Code, according to which a French commissionaire has no legal authority to conclude a contract in the name of its principal.

According to the Supreme Court, article 94 of the former Commercial Code (L 132-1 of the new Code) clearly states that a commissionaire acts in its own name on behalf of its principal. Contracts concluded by a commissionaire, even on behalf of its principal, cannot directly bind the principal to the co-contracting parties of the commissionaire. In other words, contracts concluded by a French commissionaire with third parties do not create a direct connection between the commissionaire's clients and its principal. The Court concluded that a commissionaire cannot create a permanent establishment simply as a result of the commission agreement with the principal. The Court did state, however, that there may be exceptions to this rule, such as where the terms of the commission agreement or other aspects of the instructions demonstrate that, despite the qualification of the contract given by parties, the principal is bound by contracts entered into by the commissionaire with third parties.

Preliminary comments

According to the Supreme Court's ruling, as long as a commissionaire contract complies legally and de facto with the relevant provisions of the law, a permanent establishment of a foreign principal should not be created in France.

Although it is too early to make definitive comments on the Zimmer decision, the ruling should provide relief to groups that have implemented such a structure (in particular, after the uncertainty created by the Administrative Court ruling). All affected taxpayers, however, should review their contractual agreements and policy to ensure that they comply with the provisions of French law as interpreted by the Zimmer case.

TAX NEWS - april 2010

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