However, after a certain period of time following the entry into force of the various packages of sanctions, can force majeure still be claimed for ongoing contracts?

We shall focus on force majeure claims in the context of international sanctions under French law (I), before looking at force majeure in the context of international arbitration (II) and analysing the issues relating to the temporality of force majeure claims (III).

I-              Claiming force majeure in the context of sanctions against Russia under French law

Under French law, force majeure is governed by Article 1218 of the Civil Code, which states that ” force majeure is constituted in contractual matters when an event beyond the debtor’s control, which was not reasonably foreseeable at the time of the conclusion of the contract and whose effects cannot be avoided by appropriate measures, prevents the debtor from performing his obligation“. Thus, if the conditions of unforeseeability, exteriority and irresistibility are met, force majeure can be claimed, so that when the impediment is temporary, contractual performance is suspended and when the impediment is definitive, the contract is terminated by law. However, as the French Court of Cassation very recently recalled, ‘whereas, in any event, only an event of an unforeseeable, irresistible and external nature constitutes force majeure; […] these characteristics are assessed in concreto’[1].

Regarding the French co-contractor, at the beginning of the invasion, he found himself facing an unpredictable situation, since no one had foreseen the extent of the international sanctions adopted following the invasion of Ukraine by Russia. He is also confronted with a situation of externality and irresistibility, since the situation exceeds his control, and he is unable to take measures to avoid the effects of the sanctions.

By contrast, the French Court of Cassation, faced with a force majeure claim by an Iranian bank targeted by UN sanctions, ruled in a decision of 10 July, 2020, that “freezing the assets of a person or entity affected by this measure because of its activities does not constitute a case of force majeure for the person who is subject to it, for lack of exteriority”[2]. Consequently, the Russian co-contractor who is nominally targeted by restrictive measures will not be able to claim force majeure, since he will not meet the condition of exteriority.

II-             Claiming force majeure in the context of international sanctions before international arbitration courts

Concerning sales between companies, Article 79 of the United Nations Convention on Contracts for the International Sale of Goods signed in Vienna in 1980, to which both France and Russia are parties, states that “a party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences”.

In particular, this definition has been reproduced in similar terms in Article 7.1.7 of the UNIDROIT Principles of International Commercial Contracts. As explained in the Preamble of the Principles, although the Principles are not binding per se, “they shall be applied when the parties have agreed that their contract be governed by them. They may be applied when the parties have agreed that their contract be governed by general principles of law, the lex mercatoria or the like”.

Thus, the criteria of force majeure under French law are mirrored at the international level, so that once again, the adoption of sanctions against Russia may, depending on the particular situation, constitute force majeure.

III-           Validity of the unforeseeability factor several months after the invasion

However, the question of unforeseeability arises in relation to contracts concluded after the invasion of Ukraine concerning areas which were not subject to sanctions at the time of conclusion, but which later became so.

Indeed, several arbitral awards of the International Court of Arbitration of the International Chamber of Commerce (ICC) have held that, as the relevant export controls came into force before the conclusion of the contract, the factor of unforeseeability was lacking for the situation to qualify as force majeure[3].

Consequently, it is then necessary to determine at which point one can consider that one is faced with an unforeseeable situation. In the medical field, for example, it was considered that the dengue epidemic was recurrent and therefore predictable[4] or that the arrival of the H1N1 virus had been widely predicted even before the implementation of health regulations[5]. Regarding the Coronavirus pandemic, it was recognised that it was not a force majeure situation per se but that certain situations arising from it could be considered as force majeure due to their unforeseeability, exteriority and irresistibility[6]. This can partly be explained by the unprecedented scale of restrictions adopted in response to the pandemic.

Therefore, in the context of the war in Ukraine, in the current absence of case law on the matter, it is important to note that such drastic restrictive measures have never been adopted in a similar context. Therefore, in addition to the war itself, the fait du Prince[7] resulting from it can be deemed force majeure, even several months after the entry into force of the first sanctions measures taken following the invasion of Ukraine. Thus, it is possible to consider that even for contracts signed after the invasion of Ukraine relating to areas that a person acting in good faith could not have imagined would be affected by new sanctions, force majeure could be characterised.

Conclusion

  In conclusion, it is essential to recall that the force majeure claim to justify the non-performance of the provisions of a contract requires the presence of factors of exteriority, irresistibility and unforeseeability, which are analysed on a case-by-case basis. In the context of the war in Ukraine, the sanctions adopted against Russia were of such unprecedented magnitude that it would be possible to consider that the different waves of sanctions were all unforeseeable.

            Regardless, it must be stressed that Regulation (EU) 833/2014 establishes an “anti-claims shield”[8] in the event of litigation or arbitration, which as highlighted in the decision of the Quebec Court of Appeal of 15 February 2000 in the case of La Compagnie Nationale Air France v. Libyan Arab Airlines, does not render the dispute non-arbitrable[9]. Accordingly, Article 11(1) of Regulation (EU) 833/2014 specifies that “no claims in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation […] shall be satisfied”.

            Substantially, companies that continue to do business with Russia are advised to assess the compliance of their current contracts with the various sanctions and to ensure that clauses relating to the impact of international sanctions are included when concluding new contracts.

_________________________________________________

[1] Cour de cassation, Chambre civile 3, 7 décembre 2022, n°21-12.604.

[2] Cour de cassation, Ass. Plén., 10 juillet 2020 n° 18-18.542 et 18-21.814.

[3] Recueil des sentences arbitrales de la CCI 2016-2020, Affaires 2216, 3093/3100 et 3740, Kluwer Law International, 15 janvier 2022.

[4] Cour d’appel de Nancy, 1ère chambre, 22 novembre 2010, n° 09/00003.

[5] Cour d’appel de Besançon,  8 janv. 2014, n° 12/02291.

[6] Cour d’appel de Colmar, 6ème chamabre, 16 mars 2020, n° 20/01142 ; n° 20/01143 et n° 20/01206.

[7] French legal concept used in French administrative law to designate a measure taken by the administration which has an impact on a contract to which it is party or more broadly, an arbitrary act by a government, head of state or other public authority.

[8] Pierrick Le Goff, Thierry Titone, Matthieu Dary, Natalia Ivanytska et Thibaut Brenot, « Sanctions contre la Russie : enjeux juridiques et impacts contractuels », Degaullefleurance [en ligne], 18 mars 2022.

[9] Decision of the Québec Court of Appeal [2000] R.J.Q. 717, J.Q. No. 410.

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 :

1. 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.
2. 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 1^st 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 discriminatory…
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.

B RAGER

Tax & Customs lawyer

brager@custax.com  

Paris July 19^th 2019

PAS does indeed require foreign companies not established in France but paying remuneration to employees based in France:

• That they think their strategy of deployment of this reform in view of their overall tax situation;

• That they carry out the preliminary administrative formalities allowing them to fulfill their declarative and payment obligations;

• Adapt their IT systems, including for international payments (both SEPA and non-SEPA countries), so that they can meet their new obligations in practice.

Foreign companies falling within the scope of the SAP Act may send personnel to France from different legal entities of the same group and / or from different countries. Given their specific characteristics, they will have to define an effective strategy that will allow them both to comply with the regulations and to control their costs.

Non-established foreign companies that pay employees based in France must make themselves known and register with the tax authorities in France. Without this preliminary formality and the obtaining of a SIRET number, they will not be able effectively to fulfill the obligations incumbent on them since January 1st, 2019 with regard to the withholding of the tax on the income of their employees. In practice, the registration process takes several weeks (6 to 8), the processing time by the tax authorities being a little longer than normal in 2019, given the number of applications for registration.

These foreign companies must seriously address the issue in order to meet their obligations. In the first place, adjustments to the information and payroll systems as well as the allocation of dedicated resources are to be anticipated … even if part of the task will necessarily – in their case – be outsourced : the provisions of Article 1671 -1 of the French General Tax Code (CGI) require them to appoint a tax representative for this purpose.

As an indication, in 2015 (source INSEE), 28,100 foreign companies employed nearly 1.8 million employees in France.

In addition, a number of these foreign and non EU companies that did not have any income tax liability in France so far, had -before 2019- a VAT registration either because of reporting obligations or because of the carrying out of taxable transactions in France for which they were liable for this VAT. These companies were required in this case to appoint a tax representative VAT (ART 289 A of the CGI) who – subject to his accreditation -had to proceed with  the registration of the foreign company with his own local tax center.

However, pursuant to the combined provisions of the new Articles 1671-1 and 302 of the CGI on the one hand and 111 quinquies of Appendix III to the CGI on the other hand, all tax representations are, in such a case of the cumulative VAT and PAS obligation -centralized for their management at the tax center of non-residents of the DINR (Non-Residents Tax Directorate) located in Noisy le Grand.

VAT tax representation tax records are automatically (as soon as the foreign entity is registered for the PAS[1] (with its SIREN number assigned for VAT tax representation at the origin) transferred from the local tax center of the tax representative to DINR at Noisy le Grand, without any demand to be made by the tax representative at his local agency.

Despite the fact that his former VAT accreditation remains valid, the fiscal representative will nevertheless have to apply for his “PAS”  accreditation with the DINR.

If we understand the approach of the tax administration to reinforce the controls by centralizing the files (with a probable temptation of controls to demonstrate the existence of permanent establishments), one is entitled to fear a deterioration of the quality of communication between the users (foreign companies and their tax representatives) and the administration as the communication with the DINR is long-term-deemed difficult to reach because of its congestion with regard to the ratio of workload / number of officers of this agency.

Finally, the VAT accounting audits of a US company whose tax representative is , for example, based in Toulouse are no longer conducted by the inspectors of the SIE  tax agency of Toulouse but by the agents of the DINR  based in Paris suburbs (entailing substantial costs of control of travel and accommodation) .

Everything suggests that these checks will be done more and more based on transmitted documents and in a dematerialized digital way …

Paris, March 18^th 2019

Bertrand Rager

[1] Via the on-line site dedicated to filing social returns: Net-entreprises.fr