Coupole Finance is a company incorporated under Luxembourg law, managed by Mr and Mrs A., which provides services in the field of the design, production, sale, distribution and construction of spherical houses. The company was established on 31 July 2000 and held an exclusive licence agreement for designs, models and domain names created by Mr and Mrs A., with a term of 49 years. Coupole Finance entered into master licence agreements with approximately fifteen companies, including its French subsidiary SARL Domespace International. A contract for the transfer of know-how, sale and distribution was signed on 18 December 2001 between Coupole Finance and Domespace International, providing for royalties on all sales at a sliding scale, with payment deferred until Domespace International achieved a profit of EUR 100,000.
Following a tax audit covering 2003 to 2010, the French tax authorities determined that Coupole Finance had a permanent establishment in France. The authorities found that the company owned no property in Luxembourg, employed no staff there, and used only a registered office address. Mr A. was the sole person responsible for the company’s strategic and commercial decisions, held power of attorney over its bank account, and conducted all business activities from the premises of Domespace International in France. On this basis, the tax authorities concluded that France constituted Coupole Finance’s place of effective management within the meaning of Article 2(3) of the France-Luxembourg double tax treaty. Additional corporation tax assessments for 2003–2010 and VAT assessments for 2006 were issued. The authorities also applied the extended ten-year limitation period on the ground that Coupole Finance had carried on a concealed activity in France, having failed to file tax returns or register its business. An 80% surcharge for concealed activity under Article 1728-1(c) of the General Tax Code was imposed. On the substantive adjustments, the tax authorities included in Coupole Finance’s taxable profit the royalties that Domespace International owed under the 2001 agreement, treating the non-recognition of accrued royalty revenue as an abnormal management act. The authorities also treated the exclusive licence rights as intangible fixed assets to be capitalised on Coupole Finance’s tax balance sheet.
Coupole Finance challenged the assessments before the Rennes Administrative Court, which dismissed the application. Coupole Finance appealed.
Judgment
The Administrative Court of Appeal of Nantes dismissed the appeal and upheld the assessments in their entirety.
On the permanent establishment question, the court held that Coupole Finance’s effective management was exercised from France, given that Mr A. was the sole decision-maker and operated from Domespace International’s premises. The court noted that while board meetings were held in Luxembourg and some overheads were incurred outside France, these factors were insufficient to rebut the evidence of French effective management.
Regarding the concealed activity, the court found that Coupole Finance had neither registered in France nor filed returns, and was unable to demonstrate an excusable error, particularly given that Luxembourg’s level of taxation was not shown to be comparable to France’s and that the pre-2009 exchange-of-information clause in the France-Luxembourg treaty was too restrictive to allow full communication of necessary information.
On the royalty income, the court confirmed that Coupole Finance should have recognised revenue to be received as sales were made by Domespace International, regardless of the deferral clause.
The court also upheld the capitalisation of the intangible rights, finding that the licence generated a regular and sufficiently sustainable source of profit given the 49-year term and the steady growth in royalty income. Finally, the 80% surcharge for concealed activity was confirmed.