Category: Audits & Disputes

At a glance. Article 57 of the French Tax Code does not require a shareholding relationship. In AFG Rénovations, the Toulouse Administrative Court of Appeal inferred de facto dependence from the parties’ actual operating and financial relationship. It then upheld an adjustment because the evidence also showed an excessive service price. The judgment illustrates why substance matters as evidence, but should not be treated as a substitute for the separate analysis of dependence and profit transfer.

In its judgment of 18 December 2025 (CAA Toulouse, 1st chamber, no. 23TL03074), the Court examined payments made by a French construction company to a Spanish service provider. The taxpayer argued that the two companies were legally independent and that the administration had not established either dependence or an indirect transfer of profits. The Court rejected that argument after examining how the businesses operated in practice.

A relationship without a capital link

AFG Rénovations used the Spanish company M A… 2014 SLU for subcontracting services. The administration accepted that there was no legal dependence based on ownership. Article 57, however, is not confined to formal control. A relationship of de facto dependence may be established from a set of consistent factual indicators.

The Court relied on several features of the relationship. The Spanish company had no staff or material resources in Spain and had filed no returns there during the audited years. Its bank credits came exclusively from AFG Rénovations. A co-manager of the French company directed the Spanish company and worked across all the sites. The invoices were written in French, and no subcontracting agreement was produced.

Taken together, these facts allowed the administration to establish de facto dependence. No single factor was presented as a universal test. The conclusion followed from the concentration of financing, management and operating resources around the French company.

Substance was evidence rather than an autonomous test

The case is often described as one about substance. That description is useful if it is kept precise. Article 57 does not contain a general requirement that every foreign counterparty maintain a particular level of premises, employees or assets. The absence of those elements helped reveal how the relationship actually worked and who controlled the activity.

Substance therefore supported the dependence analysis. It did not, on its own, prove that profits had been transferred. The administration still had to establish an indirect transfer of profits to the foreign enterprise.

The price of the services supplied the second part of the case

The Spanish company invoiced subcontracting services by project and by type of work. The administration compared the margins earned by the two companies. AFG Rénovations reported an average commercial margin of 0.52%, while the Spanish company’s margin was 39%.

The margin difference was considered alongside the operating facts. The French company supplied all equipment and vehicles used by the service provider. The taxpayer also asserted that the Spanish company acted as a temporary-work business and that its salary uplift coefficient was below market practice, but the file did not establish that it actually operated in that sector.

The Court concluded that the service price had been unduly increased, producing an indirect transfer of profits to Spain. The administration was therefore entitled to apply Article 57 and add back the relevant charges to the French company’s taxable income.

Dependence and profit transfer must remain separate questions

The judgment is a useful reminder of the two-stage reasoning required under Article 57:

1. Establish dependence or control. This may arise from ownership, common legal control or the factual relationship between the enterprises.
2. Establish an indirect transfer of profits. The administration must identify non-arm’s-length pricing or another mechanism resulting in an indirect transfer of profits to the foreign enterprise.

Evidence of weak substance may be relevant to both inquiries, but it does not collapse them into one. A company with limited resources is not automatically disregarded, and a dependent relationship does not by itself establish that the price is not arm’s length.

What a defensible services file should demonstrate

For cross-border services, a robust file should connect the agreement, the conduct of the parties and the pricing analysis. It should allow a reviewer to understand who performed the work, with which resources, under whose direction and for what remuneration.

• Legal framework. Keep executed agreements, scopes of work, invoicing rules and evidence of the rights and obligations accepted by each party.
• People and decision-making. Identify the personnel who performed and supervised the services, their employer and where the relevant decisions were made.
• Operating resources. Record the premises, equipment, vehicles, systems and other assets used, including any resources supplied by another group company.
• Financial independence. Explain funding arrangements, cash flows and the provider’s ability to conduct its activity without complete financial reliance on the customer.
• Performance evidence. Retain work products, correspondence, time records, project reports and other material showing that the invoiced services were actually delivered.
• Pricing support. Reconcile the charge to the provider’s costs, functions and risks and to the selected transfer pricing method. Explain unusual margin differences rather than leaving them to be discovered during an audit.
• Tax and regulatory footprint. Preserve filings, registrations and other evidence consistent with the activities said to occur in the foreign jurisdiction.

A procedural point from the judgment

The taxpayer also challenged the audit procedure. Before the accounting audit, the authorities had used investigation and information-gathering powers. The Court found no irregularity because the later accounting audit was a distinct procedure, was properly notified and relied on documents obtained during that audit. The taxpayer had also been informed of the origin and content of information obtained through the administration’s right of communication.

The limits of the decision

The judgment turns on a particularly concentrated set of facts. It does not create a quantitative substance threshold, nor does it mean that a large margin difference alone proves a transfer of profits. The Court considered the margin evidence together with the allocation of equipment, management, financing and personnel.

Expert perspective

The practical lesson is not to manufacture visible substance for its own sake. The legal structure, operating capacity and pricing policy must describe the same business. When contracts identify an independent service provider but the customer supplies its funding, direction and operating resources, the formal description becomes difficult to defend. The strongest protection is contemporaneous evidence that explains the provider’s real contribution and shows how its remuneration follows from that contribution.

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References

• CAA Toulouse, 1st chamber, 18 December 2025, no. 23TL03074, AFG Rénovations.
• French Tax Code, Article 57.
• OECD Transfer Pricing Guidelines 2022, Chapters I and VII.

Current at 5 October 2026. General information only; it is not legal or tax advice. The implications of a judgment depend on its facts, procedural status and subsequent case law.

At a glance. A restructuring decided at group level does not automatically require the parent company to bear every local cost. In Laboratoire Chauvin, the Montreuil Administrative Court considered both the French subsidiaries’ legal position as employers and the economic effects of the restructuring on their own businesses. The case shows why restructuring files need legal analysis and measurable post-reorganisation evidence.

The judgment of 27 February 2026 (TA Montreuil, no. 2315303, SAS Laboratoire Chauvin) concerned the French reorganisation that followed Valeant’s acquisition of the Bausch & Lomb group. The tax authority challenged substantial restructuring costs borne by French subsidiaries and argued that those costs should have been recharged to the Canadian parent.

The restructuring and the challenged costs

Following the acquisition, the group reorganised its French operations, including the Montpellier site operated by Laboratoire Chauvin. The measures included a redundancy plan affecting several dozen positions. The French companies incurred termination and related social costs.

The tax authority viewed the reorganisation as a strategic group decision. It therefore considered that the French subsidiaries had borne expenditure serving the parent company’s interests and should have recharged the costs to Canada.

The two legal bases used by the tax authority

The adjustments relied on two related but distinct arguments:

• Abnormal management act: the French companies allegedly reduced their own assets by assuming costs that belonged to the group’s shareholder strategy.
• Article 57 CGI: the absence of a recharge was treated as an advantage granted to the foreign parent and therefore as an indirect transfer of profits outside France.

Both arguments required the administration to demonstrate that the French subsidiaries had acted outside their own economic interest or had granted an identifiable benefit to the parent.

The employer’s legal obligations mattered

The Court first examined the legal position of the French entities. They employed the affected staff. Under French employment law, an employer bears the costs associated with terminating employment contracts and implementing a redundancy plan.

The fact that a strategic decision originated at shareholder or group level did not, by itself, transfer those legal obligations to the parent. Nor did it establish that the subsidiaries acted abnormally by paying costs attached to their status as employers.

This point is important in transfer pricing. The place where a strategy is approved and the entity legally responsible for implementing it are not necessarily the same. A functional analysis must identify both decision-making and the rights and obligations created by local law.

The Court also tested the subsidiaries’ economic interest

The legal obligation did not end the analysis. The Court examined whether the restructuring produced consequences that were economically consistent with the interests of the French subsidiaries.

The record showed improvements in several indicators after the reorganisation. Laboratoire Chauvin’s revenue, operating profit and overall operating margin increased. Bausch & Lomb France also recorded improvement in measures that included gross operating surplus. Those data undermined the contention that the subsidiaries had borne costs exclusively for the benefit of their shareholder.

On that evidence, the administration did not establish that the French companies had impoverished themselves for purposes unrelated to their own business. It also failed to identify the advantage allegedly granted to the Canadian parent under Article 57. The adjustments were discharged.

Who decides is not the only question

Group restructurings commonly originate with the parent or regional management. That fact is relevant, but it does not determine the allocation of every cost. The analysis should also ask:

• Which entity has the legal obligation to incur the expense?
• Which entity gives up functions, assets, risks or profit potential?
• Which entity receives operational savings or improved prospects?
• Would an independent enterprise have accepted the restructuring or required compensation?
• Does the arrangement involve a transfer of something of value, the termination of rights or merely the local implementation of a business decision?

These questions correspond to accurate delineation. They also help distinguish shareholder activity from a decision that, although made centrally, changes and may benefit the local business.

Build the evidence around contemporaneous indicators

Post-restructuring performance can support the subsidiary’s own interest, but later success should not be used to rewrite the information available when the decision was made. The file should begin with the forecasts, business case and alternatives considered at the time, then compare those expectations with actual results.

1. Record the commercial rationale. Explain the operational problem, proposed measures and expected local effects.
2. Map legal responsibilities. Identify employer obligations, contracts, regulatory constraints and employee commitments.
3. Analyse transferred value. Determine whether functions, assets, risks, contractual rights or profit potential moved between entities.
4. Select relevant indicators. Use revenue, operating margin, gross operating surplus, productivity, headcount, capacity utilisation or other measures connected with the business case.
5. Preserve the baseline. Retain pre-restructuring forecasts and the counterfactual scenario against which the decision was assessed.
6. Monitor actual results. Compare outcomes with the plan and explain material deviations.
7. Separate local and shareholder effects. Identify any group-level benefit without assuming that it cancels the subsidiary’s own benefit.

The decision’s limits

The judgment does not establish that local employers must always bear restructuring costs or that improved performance automatically defeats an Article 57 adjustment. Different facts may require compensation, particularly where a subsidiary surrenders valuable rights, profitable activity or realistic future opportunities for the benefit of another group entity.

It is also a first-instance decision. Its value lies in the analytical sequence: identify the legal obligation, examine the local economic interest and test the alleged foreign benefit with objective evidence.

Expert perspective

Restructuring disputes often become too focused on where the decision was made. Laboratoire Chauvin redirects the analysis to the effects of that decision. A group initiative may still serve the subsidiary’s own business. The most persuasive file establishes that interest through the legal obligations assumed locally and the operating indicators that management used to approve and monitor the reorganisation.

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References

• TA Montreuil, 27 February 2026, no. 2315303, SAS Laboratoire Chauvin (first-instance judgment).
• French Tax Code, Article 57.
• OECD Transfer Pricing Guidelines 2022, Chapter IX.

Current at 5 October 2026. General information only; it is not legal or tax advice. The implications of a judgment depend on its facts, procedural status and subsequent case law.