In more detail

It is worth noting that this is yet another CJEU judgment concerning the concept of a fixed establishment. It is also the third recent judgment (following C-333/20 Berlin Chemie and C-232/22 Cabot Plastics Belgium) that pertains to whether a company's infrastructure, which provides services to its related service recipient, should be considered as forming a fixed establishment for VAT purposes for that particular recipient

In the C-533/22 Adient judgment, the CJEU ruled — given the background facts of the case — that the acquisition of toll manufacturing services from a related party does not lead to the creation of a fixed establishment.
Specifically, the CJEU has interpreted EU VAT law to mean the following:

• A VAT payer established in one member state receiving services provided by a company established in another member state, cannot be regarded as having a fixed establishment in that other member state solely because the two companies belong to the same group or are bound by a contract for the provision of services.
• Neither the fact that a VAT payer established in one member state receiving manufacturing services provided by a company established in another member state, has a structure in that other member state that intervenes in the supply of the finished products arising from those manufacturing services, nor the fact that those supply transactions are carried out mostly outside that member state and that those carried out there are subject to VAT, are relevant to establishing, for the purposes of determining the place of supply of services, that the VAT payer has a fixed establishment in that other member state.
• A VAT payer established in one member state receiving services provided by a company established in another member state, does not have a fixed establishment in that other member state if its technical and human resources in that member state are not distinct from those by which the services are supplied to it, or if those human and technical resources perform only preparatory or auxiliary activities.

Understanding toll manufacturing services

Toll manufacturing services relate to the outsourcing of manufacturing processes. Under these services, the service recipient provides its own raw materials or semi-finished products to a toll manufacturer, which then processes these to the required specifications. This arrangement allows companies to leverage specialised equipment, labour and technical expertise without the need for significant capital investment. For VAT purposes, they are considered as provision of services.

Toll manufacturing services should be distinguished from a similar type of arrangement, namely contract manufacturing, which involves outsourcing the entire production process to a third-party. In this case, the third-party is responsible for the sourcing of materials. Contract manufacturing is typically considered as the supply of (finished) goods for VAT purposes.

The importance of the issue discussed in the judgment

Under Article 44 of the VAT Directive, the place of supply is generally the place where a taxpayer has established its business. However, if those services are provided to a fixed establishment of the taxable person located in a place other than the place where it has established its business, the place of supply of those services is the place where that fixed establishment is located.

Therefore, if a VAT payer that orders toll manufacturing services is not considered to have a fixed establishment in the country of the toll manufacturer, then the toll manufacturing services will not be subject to VAT in the country where they are physically provided. Conversely, the toll manufacturer must charge local VAT on the provision of its services, if the place of supply of services is considered to be where the toll manufacturer is located.

As will be discussed below, in some member states, the tax authorities have taken the view that the acquisition of toll manufacturing services could, by itself, lead to the creation of a fixed establishment in the country of a toll manufacturer.

Definition and interpretation of fixed establishment in the context of toll manufacturing services

The concept of a fixed is defined in VAT law (i.e., Article 11.2 of Council Implementing Regulation (EU) No 282/2011 of 15 March 2011) as: 

… any establishment, other than the place of establishment of a business referred to in Article 10 of this Regulation, 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.

Typically, a fixed establishment may be formed by a branch, office, factory or any other human and technical infrastructure that is created by a taxpayer in the territory of another state (other than the place of its principal establishment).

In some EU member states, the tax authorities — partially influenced by the CJEU's earlier judgment issued in the Welmory case (C-605/12) — have taken the position that the human and technical infrastructure of a toll manufacturer should simultaneously be considered as infrastructure that is available for the service recipient, and, consequently, that toll manufacturer service recipients should be considered to have a fixed establishment.

The situation in Poland 

For example, in Poland, the tax authorities initially (approximately, before 2015) presented a position that the acquisition of toll manufacturing services does not automatically lead to the creation of a fixed establishment in the toll manufacturer's jurisdiction. However, after the issuance of the Welmory judgment, the competent authority changed its approach and for several years claimed that by acquiring toll manufacturing services from a toll manufacturer established in Poland, the service recipient effectively establishes its own fixed establishment in Poland, and, consequently, the place of supply of toll manufacturing services is in Poland (which means that the toll manufacturer must charge Polish VAT). 

This approach was — at that time — confirmed several times as being correct by the Polish courts (e.g., judgments of the Polish Supreme Court, ref. number I FSK 160/16 and I FSK 1379/15), although the case law of the Polish courts was not consistent. Subsequently, under the influence of first Berlin Chemie and then Cabot Plastics Belgium judgments, the Polish tax authorities have again changed their approach and now they indicate that the acquisition of complex toll manufacturing services does not lead to the existence of a fixed establishment.

The situation in Romania

Based on the facts presented in the Berlin Chemie and Adient cases, it appears that similar doubts existed in Romania. This led the Romanian courts to refer two questions for preliminary rulings to the CJEU. In both cases, the CJEU clarified that the acquisition of services from a related company (i.e., general sales support services —Berlin Chemie and toll manufacturing services —Adient) does not lead to the creation of a fixed establishment.

The situation in Belgium

In Belgium, the Belgian Court of Appeal (Liège) referred a question to the CJEU (Cabot Plastics Belgium) on whether an affiliated toll manufacturer can be considered as a VAT fixed establishment of its foreign Swiss principal. In this case, the Belgian competent authority argued that the Swiss principal has a VAT fixed establishment in Belgium (by using the resources of its affiliated toll manufacturer in Belgium), and that this VAT fixed establishment is the actual beneficiary of the tolling services (rather than the Swiss head establishment), rendering those services subject to VAT in Belgium. However, the CJEU reiterated that the human and technical resources of an entity cannot be used simultaneously to provide and receive the same services. Hence, the affiliated toll manufacturer could not, in that case, be considered as a VAT fixed establishment of its foreign Swiss principal.

The situation in the Czech Republic

We have not seen the Czech tax authorities attempting to establish that an infrastructure of a toll manufacturer creates a fixed establishment for the service recipient. Regarding the Adient judgment, we note that tax authorities comment on case law only rarely, mostly when case law resonates significantly. As the judgment in the Adient case is in line with previous case law, it has not so far initiated discussions in the Czech Republic, neither within businesses nor among tax professionals.

The situation in Spain

In Spain, the Spanish Supreme Court and the Spanish General Directorate of Taxes consider that a non-Spanish based entity cannot be regarded as operating through a fixed establishment in Spain exclusively for having a Spanish subsidiary. In particular, it has already been analysed (binding consultations V2133-16 and V3458-19) that the toll manufacturing agreement between a foreign parent entity and its Spanish subsidiary itself cannot lead to the conclusion of a fixed establishment of the parent entity per se.

However, business models involving the toll manufacturing services of a Spanish-based affiliate often include additional services to be performed by such affiliate that can make a difference when considering whether the parent entity has a fixed establishment in Spain:

1. Where the legal ownership of the materials and final products is owned by the parent entity in Spain and the Spanish affiliate supplies warehousing services until its final shipment to the customer. In Spain there is a distinction for a fixed establishment  between the warehousing services and the logistic services. The   Spanish tax authorities consider (according to, inter alia, binding consultation V0842-08 and V1145-17) that the former entails that the parent entity should be considered, within a delimited and specific area of the facilities acquiring a right of disposal as a legal owner and, therefore, that the parent entity operates in Spain through a fixed establishment. The logistic services are out of scope of that specific and delimited area and, therefore, do not trigger a  fixed establishment in Spain.
2. It's also common that the toll manufacturer established in Spain performs marketing or distribution services acting as agent towards Spanish customers on behalf of the foreign parent entity. The criteria adopted by the Spanish Supreme Court determined that there is a fixed establishment where the Spanish affiliate negotiates contracts on behalf of a foreign entity (e.g., volume, prices and rebates among other contract conditions) at its own discretion, which are ratified or concluded by the foreign company without substantial modification.
3. The Spanish Supreme Court also determined that where the Spanish affiliate’s unique customer is the foreign parent , where all the productive assets are at the disposal of the parent, where the manufacturing and the distribution process are organised (i.e., in terms of when and how to manufacture and pricing and timing of the distribution) and also where the economic risk of the business activity of the Spanish affiliate is borne by the parent, the Spanish affiliate may be considered as a fixed establishment in Spain.

The situation in the Netherlands

From the Dutch perspective, a VAT fixed establishment is a fixed establishment of a head office located in another country, and it must have a sufficient degree of sustainability and a suitable structure — in terms of personnel and technical resources — to provide services to third parties. Historically, Dutch VAT legislation was already in line with the Cabot Plastics Belgium judgment of the CJEU. In addition, the Dutch Decree on VAT fixed establishments includes that, as a general rule, (and apart from very special situations) a legally independent subsidiary cannot be regarded as a fixed establishment of the parent company.

The situation in Germany 

The decision in Adient appears to confirm the CJEU's more recent rulings laying out that independent companies — such as local subsidiaries — generally do not constitute fixed establishments for VAT purposes for a foreign (parent) company (cf. Berlin Chemie AG (Rs. C-333/20), Cabot Plastics Belgium (C-232/22)). The German tax authorities have not yet specifically commented on this line of case law. The German VAT Guidelines still refer to the older CJEU case DFDS (C-260/95), which considered a UK subsidiary as a fixed establishment of its Danish parent to prevent a distortion of competition. The German authorities have also not released specific rules for the infrastructure of a toll manufacturer in terms of creating a fixed establishment. However, it appears at least likely that the German authorities would currently follow the CJEU's more recent case law (including Adient), considering that it has been repeated multiple times by now.

Hence, it appears unlikely that independent companies would currently be regarded as fixed establishments in Germany save for in exceptional circumstances. In this regard, and from a different angle, the German Federal Tax Court (BFH) ruled in 2020 that a German company's facilities could be attributed as a fixed establishment to a foreign service provider (albeit only exceptionally) if the service provider could dispose of an independent German company's personal and technical resources as if they were their own, which appears to be in line with the CJEU's general line of thinking and explanations in Adient. The BFH further specified in this context that a fixed establishment had been created in the individual case because the foreign taxpayer had influence on the selection of personnel and the procurement decisions for the office equipment in Germany, and because the rooms, together with the material and personnel equipment, were fully available to the taxpayer within the scope of their project tasks (since, without comprehensive access to the rooms and without co-decision powers regarding the procurement of material and the recruitment of personnel, this transfer of tasks could not have been reasonably carried out).

Next steps/Key takeways

The concept of a fixed establishment for toll manufacturers appears to have been interpreted differently across the EU member states. The recent judgment in the Adient case appears to provide more clarity on the required conditions for a fixed establishment for VAT purposes for EU taxpayers and member states. 

Should your company operate one or more toll manufacturers within the EU, it may be worthwhile to reconsider its VAT position(s). We are happy to discuss the impact of this most recent judgment on your operations. Please reach out to your local Baker McKenzie contact.