Permanent establishment in France: lessons from the Conversant/Valueclick case

The PE is a key concept in international taxation. It determines whether a state can tax the profits made by a foreign company on its territory. In a context where the digital economy blurs traditional borders, the recognition of a PE in France has become a major issue.

The Conversant International Ltd (formerly Valueclick) case provides a concrete and rich illustration of this problem. Through a judicial saga spanning several years, the Council of State clarified the contours of this notion, with significant consequences for corporate tax (IS) and value-added tax (VAT).

An Iconic Case for Digital Taxation

Chronological Overview of the Procedure

The Conversant case began in 2008 with services rendered in France by an Irish company through a French subsidiary. The French tax administration deemed that a permanent establishment was constituted in France, leading to back taxes for IS and VAT, increased by 80% for concealed activity. The company contested these adjustments.

After several twists (two rulings from the Paris administrative court of appeal, a first ruling from the Council of State in 2020, followed by a referral and new appeals), the Council of State issued its final decision on April 4, 2025.

The Heart of the Dispute: Recognition of a PE

The central point of the dispute revolves around the qualification of a permanent establishment in France as defined by Article 5 of the OECD model convention. Two main criteria can characterize a stable establishment:

A fixed place of business through which the company carries out all or part of its activity.

A dependent agent who acts on behalf of the foreign company and has the usual authority to conclude contracts in its name.

In this case, the Council of State relied not on the first criterion but on the figure of the dependent agent, specifically the French company Valueclick France.

The New Criterion Established by the Council of State

The 2020 Decision: A Major Evolution

In its ruling of December 11, 2020, the Council of State (n°420174) introduced innovative jurisprudence. It considers that a French company can be qualified as a dependent agent, even if it does not formally sign contracts on behalf of the foreign company, as long as it:

“decides on transactions that the foreign company merely ratifies and which, once ratified, bind it”

This new approach marks a turning point, moving away from previous rulings Interhome (2003) and Zimmer (2010), which required a formal capacity to conclude contracts. From now on, the criterion is based on the actual and repeated practice of automatic validation by the foreign company of decisions made by its French partner.

In other words, economic reality takes precedence over contractual form.

Concrete Application in the Conversant Case

In its second ruling on April 4, 2025, the Council of State confirmed that Conversant International Ltd (formerly Valueclick) indeed had a PE in France through its French subsidiary. The employees of the latter had sufficient technical and human resources to autonomously provide the digital services related to advertising connections.

It matters little, the Council of State specifies, that the servers are not located in France or Ireland. It is the functions exercised on French territory that reveal the existence of a stable establishment.

Concealed Activity and 80% Increase

Another determining aspect of the case concerns the qualification of concealed activity, which results in an 80% tax increase and an extended recovery period of ten years.

A Legal Error Rectified by the Council of State

The Paris administrative court of appeal had dismissed the concealed activity on the grounds that the jurisprudence on stable establishments was not yet stabilized at the time of the facts (2008-2012).

The Council of State rejects this argument. It considers that the legal uncertainty invoked does not negate the presumption of concealed activity. The absence of declaration of taxable activity in France characterizes this fiscal concealment, regardless of subsequent developments in jurisprudence.

Thus, the 80% increase is confirmed, as is the longer recovery period, in a logic of combating fraud and abusive optimization.

VAT and Tax Neutrality: Reminder of Principles

Conversant also argued that, even assuming a permanent establishment exists in France, this error would not have had a real impact since French clients would have spontaneously paid the VAT due.

The Council of State rejects this argument:

This circumstance was not established.

And, even if established, it would be legally ineffective since the existence of a permanent establishment de facto imposes liability for French VAT.

It concludes that the principle of VAT neutrality is not violated, and that the adjustments made are legitimate.

A Strong Precedent for Digital Economy Companies

The Conversant/Valueclick case clearly illustrates the difficulties of transposing traditional tax concepts to the digital economy. By adopting an approach based on the functional reality of activities carried out in France, the Council of State sends a clear signal:

Structures operating through subsidiaries or subcontractors in France are not immune to local taxation, even without a strong physical presence.

The notion of dependent agent is profoundly renewed.

The risk of requalification as concealed activity, with its severe consequences, is always present.

Points of Vigilance and Recommendations

In light of an evolving jurisprudential context, companies, particularly in the digital sector, must exercise increased vigilance:

Analyze the actual decision-making chain: who makes operational decisions? Where are they made?

Map the functions exercised in France: data processing, customer relations, technical support…

Examine contractual clauses and business practices: they must accurately reflect the reality of economic relationships.

Conclusion

The Conversant/Valueclick case marks a new step in defining the permanent establishment in France, particularly in the digital domain. The approach taken by the Council of State aligns with a trend towards a concrete assessment of real economic situations, to the detriment of legal appearances.

In an increasingly rigorous tax environment, centered around principles of transparency and economic substance, it is essential for international companies to verify the compliance of their operational models with French tax law.

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At PRAX Avocats, we assist companies in securing their cross-border structures and managing the tax risks associated with permanent establishments and intragroup operations. Do not hesitate to contact us for a personalized assessment of your situation.