Since the beginning of 2024, the regulations governing transfer pricing controls in France have undergone significant changes.
Three key updates, effective as of January 1, 2024, include modifications to the threshold for mandatory transfer pricing documentation, a shift in the burden of proof, and the increase of the minimum penalty for failure to respond or for providing incomplete responses to a formal notice.
Lower Threshold for Mandatory Documentation Requirements Transfer Pricing Software
Previously, French entities were required to maintain and provide transfer pricing documentation justifying their transfer pricing policies for all transactions with related entities established or incorporated outside of France if their annual turnover (excluding taxes) or gross assets on the balance sheet exceeded €400 million.
The 2024 Finance Act lowered this threshold to €150 million for fiscal years beginning on or after January 1, 2024.
Lowering the threshold has immediately brought many new French companies under the scope of the transfer pricing rules.
Shift in the Burden of Proof
The Finance Act has also altered the rules regarding the enforceability of transfer pricing documentation provided by companies.
As a general rule, it is the tax authorities’ responsibility to prove that the controlled prices deviate from those applied by comparable businesses operating under normal conditions.
However, starting from fiscal years beginning on January 1, 2024, and as an exception to this principle, companies will now bear the burden of proving the absence of indirect profit transfers when their prices do not comply with the transfer pricing methodology outlined in the documentation provided to the tax authorities.
The company must demonstrate that no profit transfer has occurred through an increase or decrease in purchase or sale prices; otherwise, the discrepancy between the reported results and the amount that would have been achieved if the documentation had been followed is deemed to constitute an indirectly transferred profit.
Increase in the Minimum Penalty Amount
French tax regulations impose a penalty for failing to respond, or for providing an incomplete response, to a formal notice issued by the tax authorities in the context of transfer pricing controls. The minimum amount of this penalty was previously set at €10,000.
The penalty is now set at the greater of 0.5% of the amount of the transactions covered by the documentation not made available to the tax authorities, or 5% of the adjustments to the results related to the transactions in question.
In addition to changing the method of calculating the penalty, the 2024 Finance Act has increased the minimum penalty by a factor of five. The minimum penalty has risen from €10,000 to €50,000.
With these new rules, the legislator aims to strengthen the control of indirect profit transfers by companies operating in France, with the goal of protecting the domestic taxable base. These new rules require businesses to exercise greater vigilance over financial flows with related entities established abroad.
