We have already discussed about the way the term 'permanent establishment' was the keyword used by most European tax authorities to search additional taxes at the subsidiaries of the Google giant in their countries, on the pretext of discrepancies between the "real" income and the one reported by those subsidiaries.

The first to realize that this search, based on the current regulations, can only lead to Error 404 (not found) were the Brits - Her Majesty's mighty Revenue and Customs (HMRC).
Therefore, in January 2016, HMRC announced an agreement with Google UK on raising its taxes, including a supplement of £130m for 2005-2015; it left aside the philosophical issue of the permanent establishment, focusing instead on the classic adjustment of transfer pricing (intra-group transaction pricing), namely the remuneration of the British subsidiary for the services to the Irish base (see TPS video - The Google tax case or A transfer pricing tale in Shakespeare's words).

On the other side of the Channel, however, the Gallic Rooster team of the French republican tax authority decided to sue Google Ireland.

But in July 2017, the Administrative Court of Paris produced an analysis about Google… not having a permanent establishment in France. Justifying the decision of sparing the company €1.115bn in damages, the French judges straightforwardly explained the technical situation - which is a good opportunity to continue our case study, especially as details about the structure of the group's business model, function assignments and risk sharing among the affiliates are provided for the first time.

The official text is available here (in French); following in italics are abridged excerpts of it.

Based on the French-Irish tax treaty for the avoidance of double taxation, "the industrial and trade benefits (i.e. profits) of an enterprise in a State are only subject to taxes in that state, unless an enterprise has industrial or trade operations in the other State through a permanent establishment there. If the enterprise has such operations, the tax on the corporate profit can be levied in the other State, only to the extent of such profits obtained by the permanent establishment.

The mere fact of a company established in one State controls or is controlled by a company established in the other State, where it operates, is not sufficient to make one of the companies the other's permanent establishment."

Not Everything Dependent Is Permanent (for Establishments)!

A person (entity) established in France, controlled by a company established in Ireland, cannot be the latter's permanent establishment, unless it cannot be considered an independent agent of the company established in Ireland and if it usually exerts in France powers of committing this company into business relations linked to this company's own operations.
In this case, the first condition is met; the Court has ascertained a double dependence, legal and economic. In 2002, Google Inc. of America signed a service contract SARL Google France, the former fully owning the capital of the latter. In 2004, Google Inc. ceded the contract to its subsidiary Google Ireland Limited. Thus, Google France cannot be considered legally independent of Google Ireland, despite the absence of direct capital links between the two companies.
Moreover, considering that the aforementioned contract is only operated in the account of Google Ireland, which paid to Google France over the years in litigation the full amount of expenses, plus an 8% margin, by way of this remuneration Google France incurred no financial risk in its operation and thus cannot be considered economically independent of Google Ireland.

Does the French Employee Have the Power of Contractually Committing the Irish Company? That Is the Question!

Thus Google, which operates an internet search engine, also offers the paid service AdWords, allowing the users who advertise (clients) to pop up a promotional link and a short ad on the screen internet surfers who search specific keywords. The ad is displayed on the side or at the top of the screen, besides the results spontaneously generated by the search engine. This service is invoiced to the client based on each click of an internet surfer on the link, and it takes into account a maximum cost per click accepted by the client in the contract with Google.

If more net surfers choose the same keywords, an automated system makes the real time selection and determines the display sequence of competing ads, based on that maximum accepted cost, on the number of previous clicks on those links, and on the quality of ads evaluated by Google.

The AdWords service is offered to the clients in two ways: OSO (Online Sales Organizations) and DSO (Direct Sales Organization). The first is for the clients who autonomously manage their advertising orders online; the second adds to it a trade counselling and assistance service to the clients (or their agents) provided in this case by the employees of Google France. Based on the existence of this DSO, the tax authority has considered that the aforementioned employees deliver online advertising on behalf of Google Ireland.

Through the aforementioned service contract, Google France provides to the Google Ireland Company "all the services, counselling, recommendations and assistance requested by the company, within the marketing and sales support to the internet search services provided in France by the Google Ireland Company. Google France also assists Google Ireland in the market analysis and strategic analysis, including the analysis of potential clients to which internet services might be sold".

The contract further stipulates explicitly: "During the sales support, Google France understands and agrees it is not authorized to commit Google Ireland, to act as its trustee or authorised representative trusted to act for or on behalf of Google Ireland, or to sign contracts or agreements on behalf of the Company. Particularly, Google France does not negotiate contracts or licenses on behalf of the Company and does not accept orders on its behalf."
The tax authority, however, asserts that - despite the aforementioned terms, which explicitly deny Google France any capacity of committing Google Ireland in any way - Google France's employees are actually authorized to sign contracts on behalf of the company.

The Court retains the administration's argument – the value added by Google France secures the sale of advertising products on behalf of the Google Ireland Company; the employees in France are equally involved in talks with the clients, in taking their orders, in post-sales operations, in managing the invoicing and claims; the internal documents of Google France, obtained during control operations, describe the mission trusted to some employees as relevant for "recruiting new clients" in order to "increase the turnover"; the testimony of several employees on professional social networks state they ensure the management of the portfolio of large clients, create commercial offers, manage a strategic portfolio in a partnership with the main media agencies, and negotiate contracts; finally, job offers on google.fr and google.com, such as "business lawyer based in Paris, in charge of negotiating and drafting trade contracts in France and in Europe." Generally, various Google France documents recurrently use terms such "sale, sales representative, sales manager."

Functions and Risks Judged Based on the Specific of the Business Model!

The Court, however, ruled with an eye to the legal form of documents and another to the specific of the business model. Although the arguments brought by the administration tend to prove that some employees of Google France were trusted with missions exceeding the terms of the service contract with Google Ireland, none of these elements allow us to establish that these employees were authorised to act for and on behalf of the Google Ireland Company.

Moreover, the very first paragraph of the AdWords contract stipulates that it is signed with "the Google entity mentioned on the cover page of the contract," which is only the Google Ireland Company. The circumstance mentioned by the tax authority of names of Google France employees called "Sales Rep." or "Account Manager" at the beginning of such contracts does not question the quality of contract part, held only by the Irish company; moreover, even as the aforementioned advertising service is "negotiated", then "closed in its substance" by employees of Google France, it was not demonstrated during the litigation - despite the authority's claim - that the actual uploading of the ads online has occurred before the final validation by Google Ireland.

Even if this validation is merely a formal control, materialized by the electronic countersigning of the order taken by the employees of Google France, it legally conditions the existence of the contract signed by the client, which means that the Google Ireland Company is not necessarily and systematically committed by a contract to the talks between the client and the employees of Google France; finally, it was not demonstrated that the employees set with the clients the price of the advertising service they sell, as long as the cost of the ad depends, as shown, on an automatic auction and on the number of clicks of internet surfers on the given link; therefore, only the actual upload online determines the sum invoiced to the client.

Thirdly, the Court rejects the allegation that Google France is authorized to close contracts, signing non-disclosure agreements for and on behalf of Google Ireland, as long as the contract stipulates that confidential information will be shared "in order to facilitate the evaluation of the products sold by Google and possibly closing and signing a business operation." When the authority invoked a contract formulation concerning the legal actions on liability and counterfeiting, by which the client waives all actions against Google France or other companies of the Google group, the Court answered it was merely a delegation of power by Google Ireland to Google France.


Google France cannot be considered as having, over the analysed period, the power of committing Google Ireland to a business relation linked to this company's own operations. Therefore, the tax authority has wrongly estimated that Google Ireland operates in France, through a permanent establishment built by Google France.