The Court of Justice of the European Union (CJEU) case law provides helpful insight. Recently, the concept of VAT FE has been the subject of a number of important decisions.
In its most recent decision from 7 April 2022, C-333/20 (Berlin Chemie), the CJEU stated that a subsidiary's human and technical resources cannot be used at the same time to provide and receive the same services. Hence, a company with a registered office in one member state does not have a VAT FE in another member state, on the grounds that that company owns a subsidiary there that makes human and technical resources available to it pursuant to intercompany contracts, under which the subsidiary provides services that are capable of having a direct influence on the volume of the principal's sales.
While the focus of the alert is on Belgium, Austria and Poland, the key implications apply to all member states: in short, uniform and harmonized guidance at EU level is desirable.
EU definition of VAT FE and intervention rule
The EU VAT legislation provides a definition of what is considered as a VAT FE. This definition is contained in Article 11 of the VAT Implementing Regulation and is derived from settled case law of the CJEU.
A 'fixed establishment' is considered to be (i) any establishment, other than the place of establishment of a business, (ii) characterized by a sufficient degree of permanence and a suitable structure in terms of (iii) human resources and (iv) technical resources (v) to enable it to receive and use the services supplied to it for its own needs or to provide the services that it supplies.
The existence of a VAT FE has an impact on:
- The place of supply of services (i.e., the place of supply of services under the general B2B rule is the place where the recipient of the services is 'established'); and
- The VAT liability of the supply itself (whereby the general reverse charge mechanism shall apply when services are rendered by a 'non-established' entity)
Importantly, the concept of VAT FE is, as a rule irrelevant, for the purposes of determining the place of supply of goods (though it can be of importance in determining the liability for VAT where certain goods are sold by a non-established entity). Additionally, the fact of having a local VAT number is not in itself sufficient to consider that a taxable person has a local VAT FE.
In order to consider that a supply is carried out by a foreign entity with a local VAT FE, the VAT FE has to be involved in that supply (i.e., the so-called intervention rule). There is a certain threshold under which the VAT FE should not be considered as involved in a transaction. A VAT FE cannot be seen as intervening in a supply by default. This should be assessed on a case-by-case basis.
In this context, when the human and technical resources of the VAT FE are not used when making a supply of services, it shall not be considered as 'intervening' in that supply. The resources of the VAT FE have to be used "for transactions inherent in the fulfilment of the taxable supply" (Article 53(2) of the VAT Implementing Regulation). Mere administrative support tasks are not sufficient for considering the VAT FE as intervening in a supply.
When the VAT FE is not deemed to intervene in the concrete supply, the taxable person shall not be considered as an 'established' entity for the purposes of determining the person liable for the payment of VAT (Article 192a of the VAT Directive).
Can a subsidiary be considered a VAT FE of its parent company?
One important issue is whether a subsidiary can be considered a VAT FE of its parent company and, if that is the case, which criteria must be taken into account in this context.
As a general rule, we note the following:
- A VAT FE should only exist within one and the same legal entity. Hence, the mere fact that a company has a subsidiary in another member state does not automatically mean that it is a VAT FE of its parent company.
- It would contravene the principles of legal certainty for a taxpayer to have a subsidiary that is treated both as a VAT FE of its parent company and a separate legal entity that is making separate supplies of goods and services.
Still, it appears that, in some circumstances, a subsidiary may be considered a VAT FE of its parent company.
- In the DFDS case, 20 February 1997, C-260/95, the CJEU ruled that a subsidiary (namely because of the fact that it was wholly owned by its parent and had to comply with various contractual obligations imposed by its parent) that merely acts as an auxiliary organ of its parent is to be considered a VAT FE of its parent company.
- In the Dong Yang case, 7 May 2020, C-547/18, the CJEU reaffirmed that, taking into account the economic and commercial realities, a subsidiary may be considered a VAT FE of its parent company, for example, where the resources of the subsidiary are available to the parent company in a way that is comparable to having its own resources locally.1 However, in determining the correct place of supply, a supplier does not need to verify whether a subsidiary is a VAT FE of its foreign parent company. The supplier only needs to identify the recipient of the service based on the following criteria: the nature and use of the service provided, the contract, the order form, the VAT identification number and which entity is paying for the service. If it remains unclear, a supplier may legitimately consider that the services have been supplied to the main place of establishment (application of Article 22 of the VAT Implementing Regulation).
In the Berlin Chemie case, 7 April 2022, C-333/20, the CJEU held that a subsidiary is not a VAT FE of its foreign parent company on the sole grounds that it:
[…] owns a subsidiary there that makes available to it human and technical resources under contracts by means of which that subsidiary provides, exclusively to it, marketing, regulatory, advertising and representation services that are capable of having a direct influence on the volume of its sales.
In this recent decision, the CJEU provides helpful insight for taxpayers on the interpretation of VAT FE and partly repudiates the restrictive view of the EU tax authorities. In this case, the human and technical resources that were made available to the parent company were the very same through which the subsidiary supplied services to the parent company. Logically, the CJEU held that the human and technical resources of a subsidiary cannot be used at the same time to provide and receive the same services. Hence, the subsidiary must not be deemed a VAT FE of its foreign parent company, solely based on the usage of these resources. In view of the above, a subsidiary cannot be considered a VAT FE of its parent company by default. The court reemphasized its long-standing approach — which is not limited to abusive practices — that the economic and commercial realities prevail over the contractual outline. However, this approach does not contribute to a high level of legal certainty in determining the place where services are deemed to be supplied for tax purposes. Hence, it remains important to review and assess the potential existence of a VAT FE when a foreign company uses the human and technical resources of its local subsidiary on a factual, case-by-case basis.
The Belgian approach
The administrative guidance makes a clear distinction between the concept of VAT FE for 'outgoing transactions' and for 'incoming transactions':
- From an outgoing perspective, a foreign taxable person shall be considered as having a local VAT FE in Belgium when the following cumulative conditions are met:
- There is a presence in Belgium of an establishment or any other installation (i.e., an office, a branch, a warehouse, a plant, etc.).
- The establishment is characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources. The Belgian tax authorities presume that such is the case when the establishment is led by a person who can legally bind the company toward clients and suppliers.
- The human and technical resources allow that establishment to supply goods or services on a regular basis.
- From an incoming perspective, the Belgian authorities refer to the broader EU definition contained in Article 11.1 of the VAT Implementing Regulation, according to which a VAT FE is considered to be:
[…] any establishment, other than the place of establishment of a business, characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs.
However, there is a lack of clarification in the Belgian guidance as to the concrete situations where a local VAT FE of a foreign entity is deemed to exist. This leads to uncertainties for the taxpayers and an increase in tax disputes — in particular, in situations where a subsidiary is considered by the tax authorities as a VAT FE of its foreign parent company.
As a general rule, it is clear that a VAT FE can only exist within one and the same legal entity. As an exception, a separate legal entity can constitute a VAT FE of another taxable person when it is not economically independent from that taxable person. The manner in which the business is conducted shall determine its degree of independence.
In this context, the Court of Appeal (Liège) (Liège 22 October 2021, 2020/RG/765) confirmed that a subsidiary may qualify as a local VAT FE of its foreign parent when — based on the commercial and economic reality — the human and technical resources of the subsidiary are used by the foreign parent for its own needs. In this particular case, accounting and other documents (CMR, insurance contracts, letters, mails, program for the management of its fleet) of the foreign parent company were found in the premises of the subsidiary. Furthermore, the staff of the subsidiary carried out the daily management of the foreign company. The Court confirmed in that case the existence of a 'disguised' VAT FE of the parent company. As a consequence thereof, Belgian VAT (and not the reverse charge) had to apply on the services invoiced by the foreign company to Belgian companies. The Court confirmed, however, that the existence of a local VAT FE should not have any impact in this case on the localization rules for the supplies of goods.
More recently, the same Court of Appeal (Liège) referred to the CJEU on 18 March 2022 (Cabot Plastics Belgium case, C-232/22) on whether an affiliated toll manufacturer can be considered as a VAT FE of its foreign Swiss principal. In this case, the Belgian authorities argue that the Swiss principal has a VAT FE in Belgium (by using the resources of its affiliated toll manufacturer in Belgium), and that this VAT FE is the actual beneficiary of the tolling services (rather than the Swiss head establishment), rendering those services VAT-taxable in Belgium. This case is still pending before the CJEU.
The above shows that the Belgian authorities tend to verify whether a subsidiary is acting toward its foreign parent company as a 'disguised' local VAT FE. It is therefore of the utmost importance to consider the commercial and economic realities of a business model before considering that a subsidiary is not a local VAT FE of its foreign parent company.
The Austrian approach
The Austrian Administrative Supreme Court (VwGH), 29.4.2003, 2001/14/0226 interpreted the VAT FE in accordance with the CJEU jurisprudence, by emphasizing the importance of a sufficient level of human and technical resources, enabling it to receive the services supplied to it and use them for its own business needs.
A VAT FE under Austrian case law is characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources, to enable it to receive and use the services supplied to it for its own needs.
Since the Austrian tax authorities explicitly and closely relied on the CJEU jurisprudence in Berkholz, C-168/84 and Planzer, C-73/06, it can reasonably be expected that they will also follow the holdings in Berlin Chemie, C-333/20.
The Polish approach
General overview
Around six to seven years ago, the approach of the Polish tax authorities and Polish administrative courts has become much more aggressive in cases where a foreign company does not have its own technical and human resources in Poland (such as a branch or office in Poland), but only acquires services from a related entity established in Poland, and these services enable or significantly support this foreign company in the process of supply of goods or provision of its own services to Polish-based customers.
The Polish tax authorities have begun to present this approach under the influence of the CJEU decision in the Welmory case, C-605/12, (this case involved a fraud structure that was used in B2C transactions — nevertheless, the tax authorities and the Polish courts commonly invoke this decision to support their position also in legal, B2B structures). In this decision, the CJEU did not exclude that in certain situations, human and technical infrastructure of a Polish service provider may effectively create a fixed establishment in Poland for its service recipient established abroad. This conclusion was to some extent confirmed in the judgment of the CJEU issued in the Dong Yang Electronics case, C-547/18 (p. 32 of this judgment), issued in 2021.
The standpoint of the Polish tax authorities may — in simplified terms — be summarized as follows: Any time a taxpayer established outside Poland (but performing supplies of goods/services, the place of supply of which for VAT purposes is in Poland) acquires from a Polish-based entity services that enable or at least significantly support its taxable activity in Poland, for VAT purposes, this entity should be viewed as having a fixed establishment in Poland.
Please note that this approach is generally more aggressive than the approach presented by the tax authorities in other member states of the EU.
Examples
To give some examples of this approach, currently the tax authorities claim that, e.g.:
- A foreign e-commerce company that purchases complex logistic services in Poland (storing goods and preparing goods for shipment) has an FE in Poland (although judgments of the Polish administrative courts are not consistent in this respect).
- A foreign company that is the owner of raw materials and purchases in Poland manufacturing services related to these raw materials (so-called 'toll manufacturing services') has an FE in Poland (In the past, the Supreme Administrative Court issued judgments clearly approving this approach of the PTA. However, recently it issued a judgment in which it ruled to the contrary, i.e., that toll manufacturing services do not lead to the existence of the FE - I FSK 660/18).
- A foreign company that acquires complex sales support, administrative and marketing services from a Polish-based related company has an FE in Poland (this approach was approved by the Supreme Administrative Court in its judgment I FSK 1777/17).
Please note that for the Polish tax authorities and the Polish courts, it is irrelevant which entity formally (from the legal perspective) employs employees/is the legal owner of the infrastructure located in Poland. What seems to be more important is (a) who decides on the organization of the infrastructure and the daily process of provision of services; (b) whether a service supplier provides similar services to other entities or is 'dedicated' only to serve its one, related service recipient; and (c) whether the service recipient has control/supervision over the infrastructure/staff, which is comparable to supervision/control over its own infrastructure.
Impact of Titanium and Berlin Chemie judgments
As of today it is very difficult to assess to what extent the CJEU judgment issued in the Titanium case, C-931/19, will influence the position presented by the Polish tax authorities/Polish courts. In our view, in practice, its influence on practice of the Polish administrative courts would be likely limited.
Regarding the Berlin Chemie judgment, it will likely impact the general approach of the Polish tax authorities with respect to fixed establishment issues (e.g., with respect to complex sales and support or logistics services acquired in Poland). However, taking into account that the CJEU did not rule out that a subsidiary providing services to its parent entity may — in certain cases ("depending on economic and commercial reality") — create a fixed establishment within the meaning of VAT law for the latter (this may, for example, take place where as a result of acquiring of services from a subsidiary, a taxable person effectively obtains the right to dispose of the human and technical resources 'owned' by its subsidiary in the same way as if they were their own), with respect to certain structures, the Polish tax authorities may still argue that in light of the Berlin Chemie judgment, foreign taxpayers acquiring services from their Polish subsidiaries should be considered as having an FE in Poland.
This should be assessed on a case-by-case basis.
Conclusion
The concept of VAT FE is important in order to determine (i) the place of taxable transactions (for services) and (ii) the person liable for the payment of VAT to the relevant tax authorities.
Although an EU definition of VAT FE exists, there is no clear guidance across the EU as to when a VAT FE is deemed to exist.
The absence of clear criteria in order to conclude that a subsidiary is a local VAT FE of its foreign parent leaves room for member states to take different views on the same transaction.
In light of the above, clear and detailed guidance of the VAT committee and the CJEU are desirable. Additionally, cross-border rulings might still be envisaged in order to clarify particular situations.
1 See also decision of the CJEU in Welmory sp. z.o.o. v Dyrektor Izby Skarbowej w Gdansku (Case C-605/12).
