Romania: Determining VAT liability when affiliated entity or subsidiary provides services and resources (CJEU judgment)
Adapted from reports prepared by KPMG member firms in Belgium and the Netherlands, addressing effects of CJEU judgment for fixed establishments
Adapted from a report prepared by KPMG member firms in Belgium and the Netherlands
The Court of Justice of the European Union (CJEU) yesterday issued a judgment in a case addressing the value added tax (VAT) concept of “fixed establishment” through services and resources of an affiliated entity or subsidiary—a concept that is critical for determining the place of supply of services and, thus, for VAT liability.
The fixed establishment concept has triggered many questions and has given rise to uncertainties with regard to the VAT position of taxable persons. The CJEU in this case concluded that a company established in an EU Member State does not have a fixed establishment in another EU Member State because it has a subsidiary there and that subsidiary provides it with human and technical resources based on contracts under which the subsidiary provides, on an exclusive basis, marketing, regulatory, advertising and representation services which are likely to have a direct impact on the company’s volume of sales.
The case is: Berlin Chemie C-333/20 (7 April 2022)
The Romanian taxpayer company provided a variety of marketing, regulatory, advertising, and representation services exclusively to a German company (an affiliated entity). The Romanian company was 100% owned by a German group company, which in turn was 95% owned by the German company.
The Romanian company considered that the place of supply of its marketing, regulatory, advertising, and representation services was Germany, and consequently issued invoices without VAT under the reverse-charge mechanism. However, the Romanian tax authorities considered that these services were taxable in Romania based on their assessment that the German company had sufficient technical and human resources at the place of business of the Romanian company, and therefore must be deemed to have a fixed establishment in Romania.
Accordingly, the tax authorities issued a notice of assessment to the Romanian company for the payment of domestic VAT, interest and penalties. The Romanian company initiated a judicial challenge that eventually was referred to the CJEU.
The decisive question is the place of supply of the services, and this is determined if the German company has a fixed establishment through the Romanian company.
- Under Article 44 of the VAT Directive 2006/112/EC, the place of supply of services to a taxable person is the place of establishment of its business, unless the services are provided to its fixed establishment elsewhere. If the services are provided to such a fixed establishment, the place of supply of the services is the location of that fixed establishment.
- Based on Article 11 of Implementing Regulation No 282/2011, a fixed establishment is an establishment characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources so as to enable it to receive and use the services supplied to it for its own needs. With this, the Romanian court raised questions to the CJEU about the interpretation of fixed establishment in the instant case.
The CJEU, in its judgment, considered that while it is not necessary for a taxable person to own the human and technical resources for the existence of a fixed establishment, it is necessary for that person to be able to dispose of those human and technical resources as if these were its own.
Furthermore, the CJEU pointed out that a fixed establishment must also be able to receive the services provided to it and use them for its business. The contention of the Romanian tax authorities came down to the fact that the resources used by the Romanian company to render the services were the same resources as those used by the German company to receive the services. However, as was noted by the CJEU, the same resources cannot be used by both companies to provide and receive the same services. As a result, the CJEU found that (assuming the referring national court reaffirms the facts in this case) the German company did not have a fixed establishment in Romania that enabled it to receive the services in Romania and use these for its business activities of selling and supplying pharmaceutical products.
The CJEU concluded that a company established in an EU Member State does not have a fixed establishment in another EU Member State because it has a subsidiary there that provides it with human and technical resources based on contracts under which the subsidiary provides the company, on an exclusive basis, with marketing, regulatory, advertising and representation services that are likely to have a direct impact on the volume of sales.
The conclusion of the CJEU may be reassuring for many VAT taxable persons, as it sets certain constrains to assessments about the existence of fixed establishments in practice.
Belgian interpretation and implications
The VAT concept of fixed establishment has triggered disputes in Belgium. For instance:
- In October 2021, the Court of Appeal of Liège delivered a judgment in which it concluded that a Slovakian company had a fixed establishment in Belgium through three affiliated companies in Belgium and that the services provided by the Slovakian company to the Belgian companies were subject to Belgian VAT.
- In January 2020, the Court of First Instance of Liège—in another case concerning the existence of a fixed establishment when the Belgian company performed toll manufacturing services exclusively for an affiliated Swiss company—concluded that the Swiss company had a fixed establishment in Belgium through the Belgian company and that the tolling services were provided to this fixed establishment. Consequently, the place of supply of the tolling services was determined to be in Belgium, and Belgian VAT was due. Note that this case has been appealed and is pending before the Court of Appeal of Liège.
At the same time, the Belgian VAT authorities are in the process of reviewing the current VAT guidance on fixed establishments. It is unknown what will be the implications of the Berlin Chemie judgment with regard to the interpretation of fixed establishment in the new VAT guidelines.
Dutch interpretation and implications
In the Netherlands, a sub-subsidiary is rarely regarded as a fixed establishment of a second-tier parent company. Under the “Fixed Establishment Decree,” the general rule is that a legally independent sub-subsidiary is regarded as an independent taxpayer. Tax professionals in the Netherlands, therefore, are reassured that the CJEU reconfirmed that a sub-subsidiary does not automatically constitute a fixed establishment for VAT purposes.
Other EU Member States sometimes see this differently. Therefore, it cannot be ruled out that in other EU Member States, a sub-subsidiary may qualify as a fixed establishment. Tax authorities may use the judgment of the CJEU in this case to argue that a sub-subsidiary does indeed qualify as a fixed establishment in certain cases. Just recently, a Belgian court asked the CJEU for a preliminary ruling in the Cabot Plastics Belgium (C-232/22) case—concerning whether a Belgian toll manufacturer can qualify as a fixed establishment of a Swiss principal.
Tax professionals believe that the CJEU judgment in the Berlin Chemie case is further relevant because the CJEU briefly explained situations when insourced / hired technical and human resources may constitute a fixed establishment. The CJEU clarified that a taxpayer does not have to have its own human and technical resources, but that it must have access to these as if they were its own resources. However, the CJEU judgment is less clear about the practical interpretation of this condition. It merely gave as an example that human and technical resources may be hired or insourced, subject to the condition that the agreements concluded for this hire may not be terminated at short notice. Time will tell how this explanation works out in practice.
What also stands out in the Berlin Chemie judgment is that the CJEU seems to only have assessed the dispute along the lines of a “purchasing fixed establishment” and not along the lines of a “sales fixed establishment.” The purchasing fixed establishment was introduced in 2011 with the entry into force of the VAT Implementing Regulation (No. 282/2011). The Fixed Establishment Decree elaborates on this concept. Typically, a purchasing fixed establishment does not provide any goods or services to third parties itself, but may purchase services for its own needs that can be used on site. By only assessing whether the taxpayer in the Berlin Chemie case had a purchasing fixed establishment, the CJEU ultimately limited the dispute to the question in which country the services received from the Romanian company were subject to VAT—in Germany or in Romania? According to the CJEU, the transactions performed from the Romanian warehouse, for which it had appointed a tax representative and was registered for VAT purposes, did not constitute a (sales) fixed establishment. What was considered to be crucial here was that the Romanian company did not directly intervene in the sale and supply of the pharmaceutical products by the German company and did not enter into any commitments with third parties on behalf of the German company.
Read an April 2022 report prepared by the KPMG member firm in the Netherlands
The Berlin Chemie judgment is the latest in a series of CJEU judgments contributing to the evolution of the VAT-concept of fixed establishment—see, for instance, Titanium C-931/19 and Welmory C-605/12). In practice, however, there may continue to be uncertainty because these judgments are based on the specific facts and circumstances of each case, and the determination of a fixed establishment remains relatively subjective, depending on the interpretation of the facts and circumstances.
Still, taxpayers need to take a moment to consider verifying the possibility of a fixed establishment in their business operations and then consider the potential implications for their VAT position. This will be important for VAT compliance and risk management because a dispute with the VAT authorities can have serious financial implications. Therefore, the concept of fixed establishment needs to be assessed with due care on a case-by-case basis.
Read an April 2022 report prepared by the KPMG member firm in Belgium
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