Transfer Pricing Requires Economic Substance Beyond Legal Form says French Court

On 10 December 2025, the Paris Administrative Court of Appeal delivered an important decision concerning the deductibility of intra-group trademark royalties within a French tax-integrated group headed by ArcelorMittal France. The dispute arose following a tax audit of its French subsidiaries, Industeel Creusot and Industeel Loire, which had paid royalties to their Luxembourg parent, ArcelorMittal SA. The decision is significant because it reaffirms that, for transfer pricing purposes, compliance documentation and legal arrangements must be supported by demonstrable financial and economic reality.

Facts of the Case

In 2008 and 2009, Industeel Creusot and Industeel Loire paid trademark royalties amounting to 1 percent of third-party turnover to ArcelorMittal SA under trademark licence agreements covering the use of the ArcelorMittal brand, logo, and related marketing elements. The French tax authorities challenged the deductibility of these royalties, considering that they were paid without genuine economic consideration and therefore constituted both an abnormal act of management and a transfer of profits within the meaning of Article 57 of the French General Tax Code. While rejecting the 1 percent rate, the authorities accepted a symbolic royalty of 0.1 percent of turnover, reflecting only the externalisation of group affiliation. These adjustments resulted in additional corporate income tax for 2008 and a reduction of the consolidated tax loss carried forward for 2009.

Key Legal Findings

The Court upheld the tax authorities’ position, holding that the decisive factor was the absence of real and measurable economic consideration. It emphasized that the French subsidiaries continued to operate under their own established “Industeel” brand, maintained independent customer relationships and distribution networks, and performed key operational functions, including quality control, themselves. The Court also noted that no decisive impact on sales volumes had been demonstrated, particularly given the highly technical, B2B nature of the products and the long lead times inherent in the order and manufacturing process. On this basis, the Court concluded that the excess royalties were devoid of consideration and therefore constituted an abnormal act of management, justifying their reintegration into taxable income without recourse to a comparability analysis.

Key Lesson: Legal Form Must Reflect Economic and Financial Reality

The central lesson of this decision is that, in transfer pricing matters, it is not sufficient for intercompany arrangements to reflect only the legal reality of the group. Trademark licences, service agreements, and transfer pricing documentation may be formally valid and compliant, yet still fail if they do not mirror the financial and economic reality of how value is actually created within the group. The Court’s reasoning shows that transfer pricing services and documentation are not merely compliance artefacts; they must articulate and evidence the underlying business logic, functional contributions, and expected benefits of the transaction. Where such economic substance is absent or merely symbolic, remuneration will be correspondingly limited, regardless of contractual wording.

Implications for Transfer Pricing Practice

This ruling underscores the importance of aligning transfer pricing policies with operational substance. Groups must be able to demonstrate, through both quantitative and qualitative evidence, how an intangible or service contributes to profitability and decision-making within the local entity. In industrial and B2B environments in particular, assumptions derived from consumer-brand models may not withstand scrutiny. The decision also confirms that, where a lack of consideration is established, tax authorities are not required to proceed to benchmarking exercises, as the transaction fails at the level of economic justification.

How Can MCORE Help

MCORE LAW supports multinational groups in ensuring that their transfer pricing frameworks reflect not only legal arrangements but also the financial and economic reality of their business models. We assist clients in designing robust transfer pricing policies, preparing defensible documentation, and aligning contractual structures with actual value creation. Our advisory approach focuses on substance, coherence, and evidentiary strength, enabling clients to manage audit risk effectively and to position themselves confidently in tax controversy and litigation contexts.