Transfer pricing

Transfer pricing

The prices that companies in the same group charge one another. A brand royalty paid to a foreign subsidiary is the most common example — and the most contested.

In brief

Arm's length principle (arm's length): the price charged between related companies must be the one that independent companies would have agreed. Article 9 of the OECD Model Tax Convention.
Reference framework: the OECD Transfer Pricing Guidelines, adopted on 27 June 1995, regularly updated.
Domestic law: Article 57 of the CGI (General Tax Code) — profits indirectly transferred to dependent foreign companies are added back to taxable income in France.
Documentation obligation (Art. L. 13 AA of the LPF), lowered since 1^st January 2024: it applies to companies whose turnover or gross assets reach €150 million (compared with €400 million previously).
Typical contested scheme: trade mark and franchise fees paid by an operating subsidiary to a group entity located in a low-tax State.

The franchise fee is the archetype of the transfer price. It is perfectly legal — the franchisor has the right to be paid for its brand and know-how — but its rate is set within the group, and therefore without genuine negotiation. Increasing it shifts taxable profit from one country to another.

The whole tax question therefore comes down to a counterfactual comparison: would an independent company have agreed to pay that rate? That is what the administration challenged in the McDonald's case, regarding the fees flowing up from French restaurants to a Luxembourg entity of the group.

The reader of the Antibes case file finds here, transposed to the scale of a multinational group, the question an operator asked himself when looking at his account statements: what exactly does what I pay correspond to?

Sources

Where this comes up in the case file

Other glossary entries — Economics