• Service: Tax, Global Indirect Tax, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Type: Business and industry issue, Regulatory update, Survey report
  • Date: 5/1/2012

Country perspectives on taxing the cloud – France 

As the cloud service contract is often a composite contract, it is necessary to determine the nature of the fee which is paid for the service. In France, software is protected by the copyright. Depending on the characterization of the fees (nature of royalties or services fees), a withholding tax may be applicable (to be analyzed based on the applicable treaty provisions). Most of the time the fee will be treated as a service fee, likely to be exempt from withholding tax by the applicable treaty. However, where the fee is also paid for the transfer of copyrights (not the right to use), it may qualify as a royalty.

Permanent establishment

For non-resident cloud service providers, a permanent establishment (PE) will only exist where the provider has a fixed place of business in France through which the business is carried out, or has a dependent agent with the ability to conclude contracts.

A French-based server used by a cloud service provider to render cloud services will create a PE in France. However, the French tax authorities (FTA) have stated that a server in itself cannot constitute a PE. The FTA characterizes a PE where employees are located on the French territory on a permanent basis to operate the server. In this respect it is unclear whether a backup server, which is located in France and does not require a permanent presence of employees, would characterize a PE.

Related party transactions

French companies will have to demonstrate that they comply with the arm’s length principle when paying fees to related parties for cloud services. Contemporaneous documentation is required in certain situations.

In order to benefit from the treaty provisions, the recipient has to be the true beneficiary of the fees. Any artificial interposition of a beneficiary would entail the non-application of the treaty and application of the domestic withholding tax rates (33.33 percent for service fees and royalties).

Indirect tax

Cloud services are subject to Value Added Tax (VAT), but raise issues such as the territoriality, the applicable rate, and how to deal with non-VAT recovering customers.

The rules are straightforward for business-to-business transactions: the transaction is subject to VAT in the customer’s country. In contrast the rules are rather complex for business-to-consumer transactions. In principle the transaction is subject to VAT in the supplier’s country (subject to reform in 2015).

The tax impacts of the processing, retention and restitution of accounting data

When using cloud services to store their financial data, French companies should ensure that they fulfill their obligations in respect of dematerialization and storage of data in outsourced servers:

  • data storage periods
  • form of data storage
  • location of data storage
  • how to retrieve the data in the event of a tax audit
  • E- invoicing (Directive 2010/45).

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Laurence Mazevet

Fidal International

+331 (0) 55681535