Functional Analysis Goes Before the French Supreme Administrative Court: A Short-Term Win for the Taxpayer, Long-Term Uncertainty for the Future

This note presents a case decided by the French Supreme Administrative Court on 4 October 2021. The main takeaway from the decision is that profit allocation needs to be based on a precise functional analysis. This means, in particular, that the use of the term “principal entrepreneur”, in practice, is irrelevant in determining whether or not a company should be allocated a residual profit or loss. Also, specific risks may justify temporary reduced profitability in certain instances.