TLDR: The anti-fragmentation rule in France is a tax measure designed to prevent companies from circumventing the permanent establishment qualification by artificially splitting their activities into isolated operations. It applies when complementary activities, carried out by closely related companies, form a coherent whole that exceeds preparatory or auxiliary thresholds.
Background and purpose
The anti-fragmentation rule was introduced to combat tax avoidance strategies where groups of companies divide their activities to avoid qualifying as a permanent establishment. This measure is particularly relevant in sectors such as banking, construction, and services, where activity fragmentation is common.
Conditions for application
The rule applies when one of the following conditions is met:
- One or more fixed facilities already constitute a permanent establishment in France.
- The activity resulting from the cumulative fragmented operations is not of a preparatory or auxiliary nature.
Affected sectors
The anti-fragmentation rule particularly impacts sectors where closely related companies divide their activities to avoid exceeding temporal or dimensional thresholds. For example, in the construction sector, companies may split contracts to avoid exceeding the 12-month duration that qualifies a site as a permanent establishment.
Option adopted by France
France has chosen Option B of Article 13 of the MLI, which limits the application of exceptions (preparatory or auxiliary activities) only to activities not expressly listed or to the cumulative exercise of activities. This option strengthens the fight against fragmentation strategies, as it does not allow the automatic exclusion from taxation of activities that, although listed as exceptions, are carried out in a coordinated and systematic manner by related entities.
"Closely related" companies
For the purposes of the anti-fragmentation rule, two or more companies are considered "closely related" according to the definition provided in paragraph 90 of section II-B-7 of the MLI. This concept is crucial in determining when apparently independent activities must be recomposed into a single whole for the purpose of qualifying as a permanent establishment.
Relationship with other anti-abuse rules
The anti-fragmentation rule fits into the broader framework of anti-avoidance measures adopted by France. However, it has a specific scope and does not apply to all forms of tax avoidance, but only to cases where the fragmentation of coherent activities aims to avoid qualification as a permanent establishment.