The concept of related companies is of vital importance in French tax law. It determines the application of numerous specific rules, notably in terms of transfer pricing and intra-group agreements. The French General Tax Code (CGI) strictly regulates this definition to prevent abusive tax optimization practices. You need to master this concept to secure your intra-group transactions and prevent any tax reassessments.

What are related companies under the CGI?

Article 39-12 of the French General Tax Code defines related companies as those with special legal, financial or economic ties. Two companies are considered to be related when one holds, directly or indirectly, more than 50% of the share capital or voting rights of the other. This holding may be direct or through a chain of shareholdings. This definition is closely linked to article 57 of the CGI, which governs transfer pricing between affiliated companies.

A non-arm’s-length relationship also exists when the same company holds the majority of the capital of two separate companies. In this case, the two entities are deemed to be related to each other. For example, if company A holds 60% of the capital of company B, which in turn holds 70% of the capital of company C, then A and C are deemed to be related within the meaning of the CGI. This configuration creates a tax group in the broadest sense, subject to specific reporting obligations.

The concept also extends to situations where one company exercises de facto decision-making power in another. This de facto control may result from management agreements, shareholder pacts conferring veto rights, or manifest economic dependence such as exclusive commercial rights. The tax authorities examine the economic reality beyond legal appearances, in particular by analyzing the concentration of sales or the financial guarantees granted.

Criteria for determining the Dependency Bond

The Shareholding Criterion

To calculate the 50% ownership threshold, you need to add up the rights held directly and indirectly. This cumulative approach includes holdings held by intermediaries or controlled companies. For example, if company A holds 30% of company C directly and 25% indirectly via company B, which it controls, the total shareholding amounts to 55%, thus characterizing a non-arm’s length relationship. The administrative doctrine set out in BOFiP-BIC-BASE-80-10-10-10 details the calculation methods, including the treatment of reciprocal or circular shareholdings.

Double voting rights or preference shares can substantially alter the analysis of control. A company holding 45% of the capital but with double voting rights on its shares may thus effectively control more than 50% of the voting rights. The tax authorities prefer a substantial approach, examining real power of influence beyond mere capital ownership. In exceptional cases, a 40% shareholding may constitute a link if it is accompanied by a shareholders’ agreement conferring de facto control, or by clear economic dependence.

De facto control and economic dependence

Beyond legal criteria, de facto control is a decisive factor. A company may be economically dependent on another without any apparent capital link. This is frequently the case in exclusive or quasi-exclusive customer-supplier relationships. The tax authorities bear the burden of proving the dependency link, which is assessed on the basis of a set of concordant indicators.

The tax authorities analyze several indicators in accordance with administrative doctrine (BOFiP-BIC-BASE-80-10-10-20): a concentration of sales generally in excess of 75-80% with a single customer, contractual commercial exclusivity, financial guarantees (deposits, cash advances) or the significant provision of resources (personnel, premises, equipment). These elements, assessed globally in accordance with the case law of the Conseil d’Etat, reveal an economic subordination characterizing the arm’s length relationship. You need to document the nature of your business relationships and demonstrate the absence of economic dependence to avoid any reclassification, bearing in mind that several criteria generally need to be met to establish the link.

The tax consequences of related company status

Qualification as a related company triggers the application of the transfer pricing regime set out in Article 57 of the General Tax Code. You must prove that your intra-group transactions comply with the arm’s length principle. Any deviation from market conditions may result in an increase in your tax base.

The full documentation obligation (master and local files) applies as soon as your group exceeds 400 million euros in consolidated sales, and the French entity generates at least 50 million euros in sales, provided it carries out transactions with affiliated companies. You must compile and make available documentation detailing your transfer pricing policy. This documentation includes a functional analysis, a comparability study and a justification of the method chosen, such as the transactional net margin method. The tax authorities may request this documentation on the basis of Article L. 13 AA of the French Tax Code, and you have 30 days in which to respond.

Penalties vary according to the seriousness of the breach, and are particularly dissuasive. The simple transfer of profits to an affiliated company is subject to a surcharge of 40% of the amount of tax reassessed (article 1729 of the CGI), which rises to 80% in the event of the absence or inadequacy of documentation (article 1729-0 A of the CGI). Failure to respond to a request for documentation within the 30-day time limit carries a fine of 10,000 euros (article 1735 ter of the CGI). These penalties are in addition to interest for late payment, and can considerably increase the cost of a tax reassessment.

Relationship Management

Documentation of intra-group transactions

You need to establish a consistent, documented transfer pricing policy. This policy is based on an analysis of the functions performed, the assets used and the risks assumed by each entity. The valuation method chosen from among the five recognized by the OECD (comparable open market price or CUP, resale price, cost plus, transactional net margin method, profit sharing) must be justified by robust comparability studies based on data from comparable independent companies. The OECD recommends a hierarchy of methods, giving preference to traditional transactional methods (UPC, resale price, cost plus) where applicable.

Master-local documentation is the international standard for transfer pricing, and is mandatory in France for groups with consolidated sales in excess of 400 million euros (master file) and entities with sales in excess of 50 million euros (local file), in accordance with article 223 quinquies B and C of the CGI. The master file presents the group’s overall organization and pricing policy. The local file details the specific transactions of the French entity and their compliance with the arm’s length principle. Groups with consolidated sales in excess of 750 million euros are also required to file Country-by-Country Reporting (CbCR). This documentation must be made available to the tax authorities within 30 days of their first request.

Advance Pricing Agreements

Advance Pricing Agreements (APAs) offer invaluable legal certainty. You can ask the tax authorities to validate your pricing method in advance. This bilateral or multilateral procedure prevents the risk of double taxation.

The APA procedure generally takes 18 to 24 months, and requires exhaustive documentation. The resulting agreement binds you for a renewable period of three to five years. This approach is particularly appropriate for complex or recurring transactions involving significant amounts.

Relationship with Group Taxation

The concept of related companies is linked to other group taxation systems, notably the tax consolidation system, which is based on stricter ownership criteria. While the threshold for qualifying as a related company is set at over 50% of the capital, the tax consolidation regime requires the parent company to hold at least 95% of the capital of its subsidiaries. This distinction is fundamental: any company consolidated for tax purposes is necessarily a related company, but the reverse is not true. BOFiP-BIC-RICI-10-150-10 explains how these two regimes work, and how they can be combined for the same entity.

Intra-group agreements must comply with both corporate and tax law requirements. The tax authorities may exercise their right of investigation under article L. 13 B of the French tax code to verify the compliance of transfer prices, including those of affiliated companies established outside France. Services, rebilling of expenses and royalties require particular attention. Each financial flow must correspond to a real counterparty and be valued at a market price.

Administrative and judicial case law is continually enriching the interpretation of the concept of related companies. In particular, the Conseil d’Etat clarified the contours of de facto control in its ruling of March 7, 2012 (n°330439) concerning the economic dependence of a franchisee, and in its decision of July 27, 2009 (n°295653) concerning the criteria for a link of dependence in transfer pricing matters. You need to keep a close eye on these case law developments to adapt your tax strategy and secure your legal arrangements in the face of tax authorities’ controls.