On July 11th 2019, the French Senate gave its final approval as to the implementation of a new Digital Services Tax (the “DST”= TSN in French for “Taxe sur les Services Numériques” ) that had been in discussion in the parliament since March. This tax has been voted with immediate effectiveness: France is a “Lone Rider” in this domain; indeed, this new DST has been voted in anticipation for a worldwide solution at OECD and EU levels… that could take a few years.
DST is supposed to be a temporary levy but is nevertheless expected -in this first version- to hit 29 non-French and one French companies and generate some 500 million euros per annum.
The DST will be applicable to gross income derived from certain digital services provided in France for which there is user involvement. The rate has been set at 3% of the “qualifying” revenues. It will only concern companies with worldwide revenues of at least EUR 750M and French “qualifying” revenues of at least EUR 25M.
The digital services in the scope of the DST tax are listed as follows :
- Online intermediation services, i.e. services consisting in making available multi-sided digital interfaces to users, allowing users to find other users and to interact with them, and facilitating the provision of underlying supplies of goods or services directly between users. Notable exceptions include intermediation services solely used to provide digital content, communication services or payment services.
- Online advertising services, particularly activities consisting in targeted advertising, and aiming at the transfer of users’ data for advertising purposes. Such services may include (but are not limited to) purchasing, storing and advertising, advertising control and performance measurement services, as well as user data management and transmission services.
Banking and financial services are excluded from the scope of DST.
Also note that services provided between related parties are excluded from the scope of the tax.
One should note that on-line linking services whose method of payment is based on a subscription, such as dating websites and computer reservation systems (CRSs), is (against expectations) in the scope of the DST.
However, the French Ministry of Finance is currently working with the operators concerned to “draft a ruling that should secure their situation”. It is also expected that the Tax Guidelines commenting the DST will specify the qualifying criteria to be regarded as CRSs.
What are “qualifying” revenues? The DST base will include all revenues (excluding VAT) over services deemed to have been rendered or supplied in France. Services are deemed to be located in France when the user is located in France (IP address is one of the means of proving this, but all other methods of proof are possible according to the law) or when the account allowing the access to the services has initially been opened in France.
The portion of the revenues attributable to France is extracted from worldwide digital revenues by applying a percentage representing the proportion of the services attached to French-based users.
The tax is due on the basis of French digital service revenues as on 31st December of each year. Taxpayers will be required to make two advance payments, the sum of which must be at least equal to the amount due in respect of the previous financial year: for most large companies, these instalments will be due in April and September, on the basis of the DST due for the previous year.
Companies may opt for a single tax return at the group level. By doing so, the revenue thresholds are added between group members. The “group tax” option is valid for 3 years.
DST is retroactive : for 2019, most companies will be paying one sole instalment, payable in October 2019, computed on the amount of French digital service revenues generated between January 1st and December 31st 2018, prorated to the number of days between the publication of the DST law bill (expected around July 20th) and October 31st, 2019 (i.e. approximately 103 days out of 365).
In the event of an audit, taxpayers must be able to provide within 2 months, all documents detailing sums collected, by category of services provided in and outside France.
The statute of limitation for this DST tax is of six years, as opposed to the standard 3 years applicable to most commercial taxes in France.
If the liable entity is not established in the European Union or in any other State party of the European Economic Area, it must appoint a tax representative to pay the DST in its place.
Custax & Legal offers such service.
On the legal level, DST raises many questions. By taxing turnover, it has an obvious cyclical character. It can hit companies that are losing money. It can also lead to double taxation for many companies that already pay taxes on the profits they make in France. Parliament indicates that the purpose of this tax is not to add additional taxation to a company that already pays tax, but rather to attract to France tax revenues that otherwise fall out of the French taxation scope.
DST also poses the question of whether it can be regarded as a VAT-assimilated tax, on which the EU has exclusive legislative power. Every portion of the DST has been drafted under the conditions of VAT, subject to the same procedures, period of calculation, audit conditions and guarantees tax representation conditions, etc.
Parliament has flagged the fact that smaller companies not paying the DST may be regarded as having received an unlawful subsidy (which is contrary to EU “state aid” regulations).
Since DST applies under specific conditions to a small number of companies,
a vast majority of which are not French, it might well be regarded as
The fact that the tax basis is highly difficult to assess, in terms of revenue extraction calculation and territoriality, might entail that DST be regarded as being unlawful since tax laws are -under the French constitution- required to be understandable (under the principle of “intelligibility”).
Finally, one should note that DST may not be deducted from Corporate profits.
Indeed, the French government has decided this on purpose: had it been deductible, it would fall into the scope of double-tax treaties … which is precisely what France wanted to avoid.
DST is out of the scope of all double tax treaties signed by France, so the tax territoriality principles under the treaties do not apply to DST and DST cannot benefit from any tax credits.
There has been advanced discussions about partially compensating DST against the “C3S” tax. However, such discussions have been abandoned since they were regarded as “too complex” and a potential legally obstacle to validating the tax.
Custax & Legal expert tax team will be happy to assist and further comment on any if the above points should you so require.
Tax & Customs lawyer
Paris July 19th 2019