FRANCE Trends and Developments Contributed by: Alexis Popov, Martin Serre and Stéphane Duchesne, &Co Advisory
• dispute prevention and resolution mechanisms, notably Advance Pricing Agreements (APAs) and Mutual Agreement Procedures (MAPs). Rising expectations on documentation and economic substance Since 2024, transfer pricing documentation has become directly opposable to taxpayers. In practi - cal terms, this significantly elevates its importance: documentation is no longer merely a defensive file prepared in anticipation of a potential audit, but rather a core element that frames the entire discussion with the tax authorities. During audits, inspectors now systematically reconcile the content of the documentation with actual conduct. This involves detailed reviews of accounting data, management reporting, internal communications and operational processes. Any inconsistency between the documented position and the observed reality is likely to be challenged. As a result, documentation is expected to go well beyond standard descriptions. In practice, the FTA expects: • a precise functional analysis with clear identifica - tion of decision‑making processes and risk control; • a coherent link between the functions performed and the selected transfer pricing method; and • robust justification for the selection of compara - ble agreements or companies, as well as for any comparability adjustments applied in benchmark - ing studies. Simplified analyses or generic benchmarking studies are increasingly viewed as insufficient. This is particu - larly true where entities are characterised as “routine” but display financial results that are inconsistent with such a profile, for example through persistent losses or significant volatility. A key development is that documentation may now be directly used against the taxpayer. Where inconsist - encies arise, the FTA may rely on the taxpayer’s own analysis to support a reassessment. This reinforces the need for internal consistency, precision and align -
ment across all components of the transfer pricing framework. At the same time, the FTA has adopted a more opera - tional reading of business models. There is growing recognition that value creation may be spread across several entities, including on a regional or functional basis. This does not reduce scrutiny; on the contrary, it increases the burden of proof. Taxpayers are expect - ed to clearly demonstrate how value is created and controlled, and how profits are allocated accordingly. Key areas of scrutiny in tax audits Loss‑making positions The treatment of loss‑making entities has become a central and recurring focus of transfer pricing audits in France. While this issue is not confined to a particular industry, it has been especially prominent in the luxury sector, where French entities often operate high‑pro - file retail locations with substantial operating costs. In practice, the FTA systematically questions situ - ations in which a French entity characterised as “routine” or limited‑risk reports persistent losses or volatility that appears inconsistent with its functional profile. This often serves as the starting point of the audit: rather than first examining how transfer prices were set, the administration focuses on whether the observed financial outcome is economically coherent. In the luxury industry, this analysis has frequently cen - tred on flagship stores located in premium areas, such as central Paris. Case law, including the Ferragamo decision, has supported the view that certain locally incurred expenses may contribute to the enhancement of foreign‑owned brands. Building on this reasoning, the FTA initially adopted relatively broad arguments, suggesting that losses incurred by French entities could reflect an implicit transfer of value, whereby the entity contributes to the development of group intan - gibles without adequate remuneration. This approach sometimes led to the recharacterisa - tion of part of the losses as an indirect benefit granted to the foreign parent, based on the idea that certain costs would not be borne by an independent party. While this reasoning could be seen as an early and relatively expansive application of DEMPE‑type con -
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