French Supreme Court Puts Contract at Center of Amex VAT Case

In a decision closely watched by financial institutions, the French Administrative Supreme Court reaffirmed the central role of contractual arrangements in identifying the recipient of services for value-added tax purposes in complex intragroup structures.

This focus on contracts and on objectively characterized roles contributes to legal certainty for VAT taxpayers. Businesses should ensure their contractual arrangements are carefully drafted; that day to day operations faithfully reflect those contracts; and that the entities involved have sufficient personnel, functions, and risk taking capacity to demonstrate real economic substance.

American Express Case

Under the three party American Express model, American Express Carte France issues and markets Amex cards in France. A UK group company acts as acquirer and enrolls merchants into the network. A US group company owns the licenses and operates the global network. The French and UK entities have no contract between them; each contracts only with the US entity.

When a French cardholder pays a merchant with a card issued by the French entity, the UK entity pays the merchant (less a merchant discount) and is reimbursed by the US entity under their contract. Under a separate contract, the French entity then reimburses the US entity for the cardholder’s purchases, keeping an issuer commission, before collecting the full amount from the cardholder’s bank account and bearing the credit risk.

EU versus non EU. Under French and EU VAT law, exempt financial services generally don’t entitle the supplier to deduct input VAT. An exception applies when exempt services are supplied to recipients established outside the EU, in which case they are treated as giving rise to a right to deduct VAT.

In this context, the French entity treated its issuer commissions as consideration for services supplied to the US entity and therefore as opening a right to deduct VAT. The French tax authorities, followed by the Paris Administrative Court of Appeal, indicated that these commissions in reality remunerated services supplied to the acquiring entity in the UK (then still an EU member country), on the basis that the UK entity should be regarded as the “beneficial recipient” of the services.

Shifting the recipient from a non EU to an EU counterparty reduced the French entity’s VAT recovery ratio and led to a reassessment.

“Economic and commercial reality” and the role of contracts. The Supreme Court disagreed with the Court of Appeal. Referring to the Court of Justice of the European Union’s Paul Newey judgment, it recalled that “consideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT,” and that “given that the contractual position normally reflects the economic and commercial reality of the transactions, the contractual terms constitute a factor to be taken into consideration for the purposes of identifying the supplier and the recipient of a ‘supply of services’.”

The Supreme Court found that the court of appeal had misread the contracts and erred in law in treating the UK entity as the recipient of the French entity’s services despite the group’s internal organization, the absence of any contract between them, and the coherent contractual allocations of roles and risks between the French and US entities.

The court concluded that the issuer commissions could only be the consideration for services supplied to the US entity. The decision also underlined that the US entity not systematically realizing a profit on these flows is irrelevant to the characterization of a service. As a result, the issuer commissions must be treated as consideration for services supplied to a non EU recipient.

Although the concept of “beneficial recipient” isn’t expressly mentioned, the Supreme Court’s reasoning clearly favors an analysis grounded in the legal and transactional arrangements between the parties.

In practice, this approach contrasts with a trend in tax audits, where contractual flows and group structures are challenged on the basis of an expansive reading of who should be regarded as the “beneficial recipient” of the services. In recent years, French tax authorities have sought to recharacterize contractual flows not only in the financial sector but also across a range of other industries.

A combined impact. This characterization has a double impact.

First, the issuer commissions remunerate exempt financial services supplied to a non EU recipient: as the recipient is established outside the EU, the services are treated as giving rise to a right to deduct VAT.

Second, in France the VAT profile of an employer’s activities feeds into the salaries tax, a specific tax applying, broadly speaking, to employers subject to VAT on less than 90% of their turnover—the amount of the tax depending on the proportion of turnover that gives a right to deduct VAT.

Treating the issuer commissions as services to a non EU recipient therefore improves both the VAT recovery and the salaries tax position, and thus the cost of employing staff in France.

Contracts, substance, and artificial arrangements. The American Express decision fits within wider case law that balances respect for contractual arrangements with scrutiny of artificial structures.

In Worms Management Services—WMS, the French Administrative Supreme Court ruled that a Jersey fund could be regarded as established in France for VAT purposes where it had no real resources in Jersey and the essential investment decisions were in practice taken in France by the French adviser’s management and staff. It thus shifted the VAT place of supply of the investment advisory services WMS provided to the fund to France.

This is also consistent with Paul Newey, where the CJEU held that contractual terms might be “disregarded if it becomes apparent that they do not reflect economic and commercial reality, but constitute a wholly artificial arrangement which does not reflect economic reality and was set up with the sole aim of obtaining a tax advantage.”

Taxpayer Impact

American Express and Worms suggest a clear line for taxpayers: Where contracts and actual operations are aligned and supported by genuine substance, they will normally be respected for VAT purposes. Where formal structures appear purely tax driven, tax authorities and courts may legitimately look through the contractual façade and attempt to challenge it.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Romain Dayan is VAT Partner, co-head of the indirect tax practice at Grant Thornton Société d’Avocats in Paris, involved in all aspects of French indirect tax, with extensive experience in the industry, automotive and technology sectors.

Robin Maubert is a VAT partner in Paris, co‑head of the France indirect tax practice at Grant Thornton Société d’Avocats, specializing in financial services VAT.

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