The Court of Justice of the European Union (CJEU) issued a judgment in a case concerning whether a subsidiary may, for value added tax (VAT) purposes, constitute a fixed establishment and, if so, how the service provider must determine whether it performs its services to the parent company or the fixed establishment.
The CJEU held that a close examination of VAT regulations reveals that a subsidiary may, in certain circumstances, be regarded as a fixed establishment for VAT purposes, but that a service provider does not have to examine the contractual relationship between the parent company and the subsidiary when determining whether it provides its services to the parent company or to a possible fixed establishment.
The case is: Dong Yang Electronics (C-547/18, 7 May 2020)
The taxpayer (an entity in Poland) assembles printed circuit boards for LG Korea (an entity established in Korea) This assembly qualified as a service for VAT purposes, with the right to levy VAT being allocated to the country where the customer was established or had a fixed establishment.
The taxpayer issued invoices to LG Korea for these services without charging Polish VAT, and qualified the Korean head office as the purchaser of its services because it had concluded a services agreement with the LG Korea and LG Korea had assured the taxpayer that, for VAT purposes, it did not have a fixed establishment in Poland.
The Polish tax authorities, however, claimed that the taxpayer was to have charged Polish VAT to the Korean entity. According to the Polish tax authorities, the Polish-resident subsidiary of the Korean entity (LG Poland) qualified for VAT purposes as a fixed establishment of LG Korea and the services of the taxpayer were provided to this fixed establishment. The Polish authorities asserted that the personnel and the technical resources of LG Poland were available to LG Korea by virtue of a contractual relationship between LG Korea and LG Poland, so that LG Poland was in fact a fixed establishment of LG Korea.
According to the Polish authorities, the taxpayer needed to determine, on the basis of the type of services provided and their use, for which establishment of the customer the service was provided (the head office of LG Korea in Korea or the alleged fixed establishment in Poland). The Polish tax authorities thus argued that the taxpayer should have concluded that LG Korea had a fixed establishment in Poland and that the services were provided to the fixed establishment and not to the head office in Korea.
The court in Poland referred the matter to the CJEU and the questions for the requested preliminary ruling were:
Although the final outcome reached by the CJEU is in accordance with the November 2019 opinion of the Advocate General, the CJEU nevertheless took its own path. According to the CJEU, it could not be ruled out that LG Poland must be regarded as a fixed establishment of LG Korea for VAT purposes. At the same time, the CJEU noted that the mere fact that LG Korea had a subsidiary in the EU does not mean that there is indeed a fixed establishment. The CJEU emphasized that the qualification as a fixed establishment does not depend of the legal form, but on the material conditions that must be assessed in the light of economic and commercial reality. Unlike the Advocate General’s position, the CJEU did not take the doctrine of abuse of law into consideration.
The CJEU continued to explain that whether there was a fixed establishment and whether the taxpayer’s services were provided to LG Korea or to the alleged fixed establishment (LG Poland) must be determined by the taxpayer as the service provider. In its second question, the referring Polish court wanted to know whether the taxpayer was required to examine the contractual relationships between LG Korea and LG Poland to determine whether LG Korea had such a fixed establishment in Poland and whether the services were provided to this fixed establishment.
The CJEU emphasized that the VAT implementing regulation contains criteria that the taxpayer must take into account in order to determine whether it provides its services to a fixed establishment of the customer. First, it must examine the nature and use of the service by the customer. When the nature and use of the service provided do not enable the taxpayer to identify the fixed establishment to which the service is provided, then the taxpayer in identifying that fixed establishment, must pay particular attention to whether the contract, the order form, and the VAT identification number attributed by the EU Member State of the customer and communicated to the taxpayer by the customer identify the fixed establishment as the customer of the service. What must also be taken into account is whether the fixed establishment was the entity paying for the service.
If, based on the above criteria, it is not possible to denote the fixed establishment of the customer as the purchaser of the service, then the taxpayer as the provider of the service may legitimately assume that the services were provided to the head office of LG Korea in Korea.
The CJEU concluded that this means that the taxpayer as the provider of the service, did not have to examine contractual relationships between its customer and the customer’s subsidiaries in order to determine whether the subsidiary can be denoted as a fixed establishment for VAT purposes.
The fact that the CJEU emphasized that a service provider does not have to examine contractual relationships within the customer’s group when determining the taxability of its services is viewed by tax professionals a positive outcome, given that the service provider after all generally has no insight into this. The CJEU thus avoided an unreasonably heavy burden of proof and additional costs for service providers.
In the judgment, the CJEU did not fundamentally rule out that a subsidiary may constitute a fixed establishment of a parent company. This is in accordance with the CJEU judgment in the DFDS case (C-260/95), but this basic assumption is rarely applied in the Netherlands.
As a general rule, a subsidiary is not regarded as a fixed establishment of a parent company. Taxpayers, thus, need to keep this case in mind and also consider whether there is a risk within the taxpayer organization that a subsidiary in the Netherlands—and especially in other EU Member States—must be regarded as a fixed establishment. Various EU Member States may view this judgment as confirmation that a subsidiary may constitute a fixed establishment and will pay much less attention to the conclusion in the judgment that the service provider could assume that it provided the service to the foreign head office. This issue is often confronted in the context of discussions about profit allocation to a permanent establishment for direct taxes (such as corporate income tax). In such cases, foreign tax authorities typically argue that a subsidiary is a fixed establishment for VAT purposes of a foreign parent company.
The term “fixed establishment” (as used for VAT purposes) is rapidly developing. Within the EU, there have been disputes about the alleged presence of fixed establishments for VAT purposes (whether or not inspired by the Welmory judgment, C‑605/12). For example, an Austrian court recently sought a preliminary ruling from the CJEU about the term “fixed establishment” in the Titanium Ltd case (C-931/19).
EU Member States still differ in their interpretation of the term “fixed establishment.” The CJEU’s judgment is unlikely to eliminate these differences.
The term “fixed establishment” not only plays a role in determining the taxability of a service, but is also relevant for international supplies of goods. One of the VAT “quick fixes” that took effect beginning 1 January 2020 is the simplification of the VAT treatment of call-off stock that a taxpayer holds in another EU Member State. However, this simplification does not apply if the supplier has a fixed establishment in the country where the call-off stock is located. A question that is often raised in practice is whether maintaining a local supply of stocks results in the presence of a fixed establishment, and that question is not always easy to answer.
The CJEU judgment shows how important it is to verify whether, for VAT purposes, there is a fixed establishment. Prudent taxpayers would look to see whether it has been properly determined that a customer has a fixed establishment, as well as whether it is possible that the taxpayer’s organization may have fixed establishments outside the Netherlands.
Given that the concept of “fixed establishment” is rapidly developing, taxpayers will want to consider properly documenting their findings in the event the tax authorities raise questions about it.
Read a May 2020 report prepared by the KPMG member firm in the Netherlands
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