Are companies below the EUR 150 million threshold exempt from documenting their transfer prices?

The EUR 150 million threshold is frequently interpreted as a boundary between companies that are expected to document their transfer prices and those exempt from them.

This reading is incorrect.

A company below this threshold may remain subject to the full documentary obligation because of its membership in a group. Even when it does not fall within the scope of the Master File and the Local File, it must be able to justify the financial conditions of its transactions with foreign related companies.

The principle of full competition laid down in Article 57 of the General Tax Code applies irrespective of the size of the undertaking.

The EUR 150 million threshold therefore mainly determines the scope of a formalised documentary obligation. It does not constitute a general transfer pricing exemption or protection against tax relief.

What is the EUR 150 million threshold?

Article L. 13 AA of the Book of Tax Procedures requires certain legal persons established in France to keep at the disposal of the administration a complete documentation of their transfer pricing policy.

This documentation consists of:

a master file, or Master File, presenting the group as a whole;
a local file, or Local File, dedicated to the French company and its transactions with associated foreign companies.

Since the financial years opened on 1 January 2024, the obligation applies in particular to undertakings whose:

the annual turnover excluding taxes is greater than or equal to EUR 150 million;
or gross assets on the balance sheet are greater than or equal to EUR 150 million.

The threshold was previously set at EUR 400 million. Its lowering has brought many mid-size companies into the field of the complete documentary obligation.

However, the analysis cannot stop at the turnover or assets of the French company alone.

A company below the threshold can be submitted to the Master File and the Local File

Article L. 13 AA of the LPF takes into account capital ties and group membership.

A French company with a turnover of less than EUR 150 million remains subject to the documentary obligation when it:

owns directly or indirectly more than half of the capital or voting rights of an entity that reaches the threshold;
is owned, directly or indirectly, more than 50 % by an entity that reaches the threshold;
belongs to an integrated tax group comprising at least one company meeting the legal conditions.

A French subsidiary with a turnover of EUR 40 million can therefore be submitted to the Master File and the Local File if its foreign parent company exceeds the threshold of EUR 150 million.

Conversely, a French company with a turnover of EUR 120 million will not necessarily be subject to the full documentary obligation if no related entity meets the criteria of Article L. 13 AA and does not belong to an integrated tax group comprising such an undertaking.

The threshold analysis must therefore be carried out at the level of the legal and capital structure, not solely on the basis of the accounts of the French company.

Some examples of application

Situation of the French company	Master File and Local File mandatory?	Other possible obligations
Turnover of EUR 170 million	Yes	Declaration 2257-SD
EUR 80 million turnover, 100% owned by a foreign company with EUR 500 million	Yes	Declaration 2257-SD
Revenue of EUR 30 million, member of an integrated tax group comprising a company with EUR 200 million	Yes	Declaration 2257-SD
EUR 100 million turnover, with no related entity reaching EUR 150 million	No, subject to full group analysis	Declaration 2257-SD and price justification
Turnover of EUR 40 million, without linked entity reaching thresholds but with significant intra-group international flows	No under Article L. 13 AA	Application of section 57 of the CGI and possible request based on section L. 13B of the GPA

These examples show that there is no answer based solely on the turnover of the company concerned.

The arm's length principle applies without threshold conditions

Article 57 of the General Tax Code allows the tax administration to reinstate profits indirectly transferred to related companies established outside France into taxable income in France.

A transfer of profits may include:

an abnormally low selling price;
excessive purchase price;
underpaid benefits;
management fees without proven counterpart;
an unjustified trademark fee;
a non-market-compliant intra-group interest rate ;
an unpaid guarantee;
a waiver of a debt or benefit without consideration;
insufficiently remunerated transfer of anintangible activity or asset.

No turnover or asset threshold is provided for the application of Article 57 of the CGI.

An SME carrying out transactions with a subsidiary, parent or sister company established abroad must therefore be able to demonstrate that the conditions applied comply with the arm's length principle.

The absence of an obligation to formally produce a Master File and a Local File does not remove this justification requirement.

Can the administration request documentation from a company below the threshold?

Where a company does not fall within the scope of Article L. 13 AA of the GPA, the administration may use the procedure laid down in Article L. 13 B.

This procedure can be implemented during an audit or an accounting review where the administration has gathered evidence suggesting the existence of an indirect transfer of profits abroad.

It may then ask the company for information and documents relating to:

the nature of its relations with foreign companies;
the capital structure of the group;
the industrial, commercial or financial operations concerned;
methods used to determine prices;
the justification for these methods;
activities carried out by foreign companies;
the counterparties obtained by the French undertaking ;
the tax treatment of transactions in the State of the associated undertaking.

The request of the administration must be precise. It must identify the nature of the activities or products concerned, the country, the foreign enterprise and, where appropriate, the amounts involved.

The initial response period may not be less than two months. It may be extended on a reasoned request, without its total duration exceeding three months.

Where the response is insufficient, the administration may issue a notice to complete it within 30 days.

The company below the EUR 150 million threshold therefore does not benefit from an exemption from documentation. It can be led to produce, during the control, a demonstration very close to that contained in a Local File.

What penalties should be imposed in case of failure to respond?

The minimum fine of EUR 50 000 provided for in Article 1735 ter of the CGI concerns the failure to submit or partial presentation of the compulsory documentation under Article L. 13 AA of the LPF.

A company outside the scope of this obligation is not subject to this penalty solely because it has not prepared a Master File and a Local File.

However, it remains exposed to other consequences.

Failure to respond to a request made on the basis of Article L. 13b of the LPF results in a fine of EUR 10 000 for each financial year covered by the request.

Above all, insufficient evidence may lead the administration to:

restore market-compliant remuneration;
use its own comparables;
questioning the deductibility of certain charges;
reinstate a profit on the basis of Article 57 of the CGI;
apply interest on late payment;
apply the increases corresponding to the nature of the infringement;
claim, depending on the flows concerned, withholding tax at source.

The main risk therefore lies not only in the documentary fine. It resides in the company's inability to defend the financial conditions of its intra-group transactions.

Reporting threshold 2257-SD is different

The complete documentary obligation must be distinguished from the annual transfer pricing return provided for in Article 223dB of the CGI.

This declaration, usually drawn up on the basis of Form 2257-SD, concerns in particular French companies whose annual turnover excluding taxes or gross assets is greater than or equal to EUR 50 million.

It may also apply to an undertaking below this threshold when it:

owns directly or indirectly more than half of an entity up to EUR 50 million;
is more than 50 % owned by an entity meeting this threshold;
belongs to an integrated tax group comprising an entity that meets these conditions.

A company with turnover between EUR 50 million and EUR 150 million can therefore:

not be submitted to the full documentation of Article L. 13 AA;
but be required to file the annual declaration 2257-SD;
and must, in all cases, justify the arm's length nature of its transactions.

Reporting 2257-SD shall include the main categories of transactions, the corresponding amounts, the courts concerned and the transfer pricing methods applied.

It does not constitute a complete documentation, but the reported information must be able to be justified and remain consistent with the company's accounts, contracts and practices.

Should a company below the threshold prepare a voluntary Local File?

The preparation of a compliant Local File in all its components is not always necessary for a company that is actually outside the scope of article L. 13 AA.

However, it is recommended that a dossier be drawn up proportionate to the risks and amounts involved.

This file may include:

an organization chart of the group;
identification of associated undertakings;
a mapping of intragroup transactions;
amounts recorded by category of flows and by jurisdiction;
intra-group agreements;
invoices and supporting documents;
a description of the functions performed, the assets used and the risks assumed;
the method used for each transaction;
compensation calculations;
market or comparable data available;
reconciliation with the accounts;
evidence of the reality and usefulness of the services;
an explanation of any year-end adjustments.

Proportionate documentation does not mean summary documentation. It must be sufficiently precise to answer questions that an auditor would ask.

What flows should be documented as a priority?

The depth of the documentation must be adapted to the level of risk.

Particular attention should be paid to the following:

Management fees

The company must be able to demonstrate the reality of the services, their usefulness to the recipient company, the absence of duplication, the composition of the cost base and the justification of the margin applied.

Intra-group financing

Loans, guarantees and treasury operations must be analysed against the borrower's credit profile, duration, currency, guarantees, subordination and market conditions.

Royalties and intangible assets

The legal existence of a trademark or patent is not sufficient to justify the remuneration of its owner. The functions actually performed to develop, improve, maintain, protect and exploit the asset should be examined.

Recurring losses

A French company bearing long-term losses while the other entities in the group remain beneficiaries presents a particular risk. The distribution of functions and risks should be accurately analysed.

Restructuring

The transfer of an activity, customer, function or intangible assets may require compensation, even when no legal assets are formally transferred.

Transactions with tax-reduced jurisdictions

Transactions with entities located in tax privileged states are generally subject to increased vigilance.

When should voluntary documentation be prepared?

Documentation should not be created for the first time after receipt of an audit notice.

Late preparation makes it more difficult:

the reconstitution of decisions taken several years earlier;
identification of the functions actually performed;
collection of supporting documents;
reconciliation of calculations with accounting;
searching for contemporary market data;
explanation of method changes or adjustments.

Documentation should be prepared at the time of implementation of the transaction and reviewed annually.

This approach also allows for the identification of discrepancies between the planned policy and actual results before the accounts are closed.

Documentation must be proportionate but defensible

Not all companies must produce a document of several hundred pages.

The level of documentation must depend on:

the amount of transactions;
their frequency;
their complexity;
the functional profile of the entities;
the presence of intangible assets;
the level of risk incurred;
the courts concerned;
observed financial results;
whether or not internal comparables exist.

A small administrative benefit does not necessarily require the same analysis as technology transfer, significant financing or international restructuring.

However, proportionality never exempts from answering the three essential questions:

What operation was actually carried out?
Which entity performs the functions and assumes the corresponding risks?
Why does the chosen remuneration respect the arm's length principle?

Good practices for SMEs and mid-size groups

A company below the EUR 150 million threshold should at least:

annually check whether it falls within the scope of Article L. 13 AA taking into account all its capital links;
determine whether to file the 2257-SD return;
identify all transactions with foreign related companies;
verify consistency between contracts and actual practices;
document transactions with the most significant amounts or risks;
maintain calculations, invoices and evidence;
bring documented flows closer to accounting;
analyse unusual losses, adjustments and variations;
regularly update economic analyses;
prepare an internal response procedure in case of fiscal control.

Accompaniment of a lawyer in transfer price

Determining the bonds of a company below the EUR 150 million threshold requires an analysis of the group structure, the capital links and the nature of international flows.

The Cabinet Édouard Pruvost supports SMEs, mid-cap companies and international groups in:

analysis of their subjectness to documentary obligations;
verification of the reporting obligation 2257-SD;
mapping intra-group transactions;
preparation of proportionate documentation;
drafting and reviewing intra-group conventions;
carrying out functional analyses;
the justification of remuneration methods;
secure management fees, financing and fees;
preparation and management of tax controls;
the defence of undertakings in the event of rectification.

Therefore, being below the EUR 150 million threshold does not mean that it is exempt from documenting its transfer prices. This mainly means that the form and level of documentation must be determined in the light of the group's situation, the applicable reporting obligations and the risks inherent in the transactions carried out.

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