Permanent establishment risk in digital business models after the Conversant case

In international tax planning, service agreements are often treated as a shield.

Draft the right clauses. Avoid signing authority. Separate roles on paper.

For digital businesses, that approach is no longer sufficient.

In its Conversant decision of 4 April 2025, the French Conseil d’État delivered a clear message: substance prevails over contractual form — and the cost of getting it wrong can be extreme.

The case: a classic digital services structure

The case involved an Irish company operating in the digital marketing sector.

Its French affiliate provided support services under a cost-plus agreement. The contract was carefully drafted:

• no authority to bind the Irish company,
• no power to conclude contracts,
• a strict separation between “support” and “commercial” activities.

On paper, the structure looked compliant.

The French tax authorities disagreed.

What the tax authorities observed

Rather than focusing on contractual wording, the authorities analysed how the business actually operated.

They concluded that in practice:

• negotiations with clients took place in France,
• customer relationships were handled locally,
• key operational and commercial decisions were made by the French team.

As a result, they considered that the Irish company had:

• a fixed place of business permanent establishment in France, and
• a dependent agent permanent establishment, despite the absence of formal signing authority.

What the Conseil d’État confirmed

The Conseil d’État upheld the reassessment and clarified several critical points.

No signature power does not mean no permanent establishment

The Court confirmed that formal authority to sign contracts is not decisive.

A permanent establishment may exist where a local entity:

• habitually plays a decisive role in concluding transactions,
• finalises essential elements of deals,
• or effectively commits the enterprise, even if contracts are signed elsewhere.

This is particularly relevant in digital business models, where negotiations and execution are often fragmented.

OECD Commentaries can clarify treaty interpretation

The Court also accepted that Commentaries to the OECD Model Tax Convention may be used to interpret permanent establishment concepts, even if those Commentaries were published after the relevant treaty was signed.

This confirms a dynamic interpretation approach — one that adapts treaty concepts to evolving business realities.

Hidden activity triggers the harshest consequences

Perhaps the most striking aspect of the decision lies in its consequences.

Because the permanent establishment had not been declared, the Court validated:

• a 10-year statute of limitations, and
• an 80% penalty for hidden activity (activité occulte).

This is not a standard reassessment.

It is a punitive outcome reserved for situations where activity is considered concealed.

Why digital businesses are particularly exposed

Digital business models amplify permanent establishment risk.

Why?

• Value creation is often decentralised.
• Customer interaction can be local, even if platforms are global.
• Contracts may be standardised, while negotiations are not.
• Execution may occur where teams are located, not where entities are registered.

In this environment, paper separation is fragile if operational reality points elsewhere.

Key lesson: substance creates nexus, not contracts

The Conversant case reinforces a core principle of international taxation.

Tax authorities will look at:

• who actually negotiates,
• who manages customer relationships,
• where decisions are made,
• and how the business is run day to day.

Contracts matter — but only insofar as they reflect reality.

When they do not, they offer little protection.

Conclusion: stress-test your permanent establishment risk

For international entrepreneurs, especially in the digital sector, the takeaway is clear.

Permanent establishment risk is no longer theoretical.

And the cost of non-compliance goes far beyond additional tax.

A practical reminder

If your business relies on:

• service agreements to separate functions,
• remote or hybrid teams,
• or digital operations with local market interaction,

you should be asking one question regularly:

Would our structure survive a substance-based review — not a contractual one?

How we can help

At Altara Tax, we assist digital and international businesses in:

• identifying permanent establishment risk based on real operations,
• stress-testing existing service models,
• and restructuring proactively before exposure turns into penalties.

In international taxation, contracts describe intentions.
Substance determines outcomes.