The concept of related companies within the meaning of the French General Tax Code (CGI) is a fundamental element of French tax law. This qualification determines the application of specific rules on transfer pricing and intra-group agreements. You need to master this definition to secure your cross-border operations and avoid tax reassessments.

What are related companies under the CGI?

Article 57 of the General Tax Code is the key provision defining related companies in the context of transfer pricing. Two companies are considered to be linked when one directly or indirectly holds the majority of the share capital of the other, or when they are controlled by the same person or entity. Article 39, 12 of the CGI supplements this definition by specifying certain aspects of dependence between companies that are legally independent but linked by economic ties.

The criterion of control is not limited to capital ownership. You must also consider situations of de facto dependence that create a link of economic subordination. A company may be considered to be dependent if it exerts a decisive influence on the commercial decisions of another company, even if it has no shareholding. This dependence may result from a binding commercial exclusivity, a critical technological dependence (access to essential patents, exclusive licenses), or a community of economic interests. This extensive approach aims to capture all forms of real economic control, beyond mere capital ties.

Capital ownership criteria

Holding the majority of share capital or voting rights is the first criterion for de jure control. You need to calculate this holding by taking into account both voting rights and financial rights, which may differ depending on the legal structure adopted. The threshold of control is generally assessed at over 50%, but the qualification of related companies can result from other configurations: holding the majority of voting rights even with a minority shareholding, or vice versa. The tax authorities also examine cross-shareholdings and complex chains of control to establish the arm’s length relationship. For indirect shareholdings, you need to multiply the percentage holdings at each level of the control chain to determine the percentage of effective control.

Ownership thresholds are determined at the end of the tax year. A change in capital structure during the course of the year may therefore alter the classification of relations between companies, and cause two entities to switch from the status of independent companies to that of affiliated companies, with all the tax consequences that this entails. It should be noted, however, that a relationship of dependence can also be established without a capital holding if de facto control can be demonstrated by other means. This rule is part of the broader framework of corporate group taxation, which governs all tax interactions between related entities.

De facto dependence and effective control

In addition to capital criteria, the tax authorities analyze the economic reality of the relationship. You may qualify as a related company if you depend on a single supplier for your critical supplies. This commercial dependence creates a relationship of economic subordination akin to control.

Family ties between directors also constitute an indication of dependence. Two companies run by members of the same family may be reclassified as related companies. The authorities examine financial flows, contractual conditions and commercial practices to establish this qualification.

The tax consequences of qualifying as a related company

Classification as an affiliated company triggers the application of article 57 of the CGI. This provision allows the tax authorities to rectify prices charged in transactions between related entities. You must justify that your prices correspond to those that would be charged between independent companies under normal market conditions.

The arm’s length principle applies to all your intra-group transactions. You must document your transfer pricing policies and demonstrate their compliance with international standards. The absence of appropriate documentation exposes your company to substantial tax reassessments, together with late payment interest and penalties.

The documentary obligation and the burden of proof

As soon as your consolidated sales or balance sheet total exceeds 400 million euros, you must compile and keep detailed documentation on your transfer prices. Above 750 million euros in consolidated sales, you are also subject to Country-by-Country Reporting. Documentation must include a functional analysis, a comparability study and a justification of the pricing method used. In the event of insufficient or late documentation, you are liable to a penalty of 5% of the amount of undocumented transactions. The tax authorities allow you 30 days to submit this documentation on request.

The OECD recognizes five main methods for determining your transfer price: the comparable open market price (CUP) method, the resale price method, the cost plus method, the transactional net margin method (TNMM) and the profit split method. The choice of the appropriate method depends on the specific circumstances of each transaction, the nature of the operations and the availability of comparable data. You should update this documentation regularly to reflect changes in your business and the economic environment.

Risks of adjustment and applicable penalties

The tax authorities may question your transfer prices within three years of the tax assessment. This period may be extended to ten years in certain serious situations, notably in the case of concealed activity or an undeclared foreign establishment. Adjustments involve the reintegration of unduly transferred profits into your taxable income.

Penalties vary according to the seriousness of the breach. In the case of deliberate non-compliance, the penalty is 40%; in the case of fraudulent maneuvers, the penalty is 80%. A specific penalty of 5% applies in the event of insufficient documentation or failure to submit documentation within the required deadlines, capped at €10,000 per financial year for national documentation and €50,000 for the group’s main file. These penalties are in addition to late payment interest calculated at a rate of 0.20% per month on the recalled duties, which considerably increases the tax cost of the reassessment.

There are, however, a number of ways in which you can limit the impact of a tax reassessment. If you can demonstrate that you are acting in good faith, you can apply to the tax authorities for an ex gratia remission of penalties. A settlement can also be negotiated to reduce the penalties. In addition, a transfer pricing tax reassessment may result in double taxation if the country of the affiliated company does not make a symmetrical adjustment. To remedy this, you can activate the mutual agreement procedures provided for in international tax treaties, enabling the competent authorities to find a concerted solution.

Securing your relationships with related companies

A robust transfer pricing policy is your first line of defense. You need to identify all your transactions with related companies and assess their compliance with the arm’s length principle. This preventive approach significantly reduces your exposure to tax risk.

Obtaining an Advance Pricing Agreement (APA) offers you optimum legal security. This procedure enables you to validate your transfer pricing method with the tax authorities in advance. The APA is binding on the tax authorities for a fixed period, generally four years and renewable.

You also need to anticipate regulatory and case law developments. The OECD’s international transfer pricing standards evolve regularly. Your documentation and practices must adapt to these changes to remain compliant. Specialized legal support enables you to navigate effectively in this complex environment and optimize your tax strategy while controlling your risks.