The concept of a fixed establishment (“FE”) plays a crucial role in the VAT system. In practice, however, this concept raises many questions, partly because the exact scope and boundaries of the concept are not always clear. The Court of Justice of the European Union (“ECJ”) has indeed had to rule on this concept in three different cases over the past three years.
Here we first recall the context and then briefly discuss the different judgments and the lessons that can be drawn from them.
The concept of an FE makes it possible to determine whether or not a company is established in a different Member State from the one in which it has its registered office. Such presence may result in it being considered a taxable person established in the State where it has its FE and, as such, being liable for the payment of VAT.
The FE is also of particular importance in the context of the localisation of services and thus determines where VAT will be due. As a reminder, services supplied to a taxable person are in principle located in the place where that taxable person has established his business. However, by way of exception, those services will be located in the place where the recipient has an FE when the services are supplied to that FE. Furthermore, services supplied by a taxable person to a non-taxable person are, in principle, deemed to be located where the taxable person has established his business, unless those services are supplied by an FE of the supplier.
In a regulation of 2011, which is directly applicable in the Member States, the Council, based on the ECJ case law at the time, defined an FE as 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, enabling it, as the case may be, to receive or provide services. As mentioned, despite this definition, there are still uncertainties which have given rise to various disputes. As a result of those disputes, the ECJ has been able to further clarify the scope of the concept of an FE.
Dong Yang – 7 May 2020 – C-547/18
In this first case, the ECJ recalled that it is not excluded that a subsidiary of a company established in a third country may constitute an FE. However, the mere fact that that company has a subsidiary should not, in a B2B context, lead the service provider to the conclusion that the company has established an FE there. The ECJ points out that, in order to determine whether the service provider is providing a service to an FE, the regulation of 2011 stipulates that the service provider must examine the nature and the use of the service provided. If that does not make it possible to identify the FE as the recipient, the service provider must assess whether the contractual documents identify the FE as the recipient and whether it is the FE that pays for the services. If these criteria do not identify an FE as the recipient, the service provider may assume that the services are supplied in the place where the recipient has established his business. However, the ECJ clarifies that a supplier is not required to analyse the contractual relationship between the subsidiary and its parent company in order to determine whether or not the latter has an FE.
Titanium LTD – 3 June 2021 – C-931/19
A year after the first judgment, the ECJ was asked whether a rented-out property can constitute an FE. In this case, the Austrian tax authorities considered that Titanium, a company established in a third country, had an FE in Austria. Titanium owned a building which it let to two Austrian enterprises. In addition, it had instructed an Austrian company to manage the building (with regard to invoicing the rent, contacts with service providers and suppliers, carrying out various administrative tasks, etc.). However, Titanium continued to take the important decisions concerning the building.
The ECJ therefore ruled that Titanium did not have an FE in Austria because it did not have staff of its own in Austria. Only contractually mandated persons were active there. A building for which the owner does not have its own human resources, allowing it to act independently, cannot be considered an FE.
Berlin Chemie – 7 April 2022 – C-333/20
After the Titanium judgment, the question arose as to what should be understood by own human and technical resources for the concept of an FE. In a third, recent judgment, the ECJ was able to clarify that these resources are “own” to the taxable person if he can dispose of them as if they were his own resources, for example on the basis of service or leasing contracts which make those resources available to the taxable person and cannot be terminated at short notice. Thus, in respect of human resources, an employment contract is not a necessary condition for being regarded as the “own” human resources of the taxable person.
Next, the ECJ makes another important clarification. In the case at hand, the Romanian tax authorities considered that a Romanian company constituted an FE of a German company belonging to the same group. The former company supplied numerous services exclusively to the German company, according to its instructions. The Romanian tax authorities therefore considered that the subsidiary was both the supplier of the services and the FE receiving the services. The consequence of this adjustment was that, according to the Romanian tax authorities, the services of the Romanian company were deemed to be supplied at the location of the FE and therefore should be invoiced with Romanian VAT (instead of VAT reverse charged to Germany). However, the ECJ ruled that it is not possible for the same resources to be used to supply and receive the same services at the same time. Thus, the circular reasoning of the Romanian authorities was rejected by the ECJ because it was too far from the economic and commercial reality!
What to do now?
In the light of the above judgments, it seems to us that the ECJ gives a rather strict interpretation of the concept of an FE for VAT purposes. As the ECJ itself notes in the context of the localisation of services, the basic rule is that these are deemed to be supplied to/by the head office and only exceptionally to/by the FE. Consequently, no broad interpretation can be given to this concept.
We note, however, that in some cases the Belgian tax authorities apply a broad interpretation of the concept of an FE. For example, the authorities do this by considering a subsidiary to be both the supplier and the FE receiving the services. If you have received an adjustment in Belgium that is not in accordance with the above-mentioned jurisprudential principles, it seems advisable to update your arguments or to lodge the necessary administrative or judicial appeal in order to safeguard your rights. In this respect, we remind you that previous acceptance of an adjustment and payment of the VAT claimed by the authorities does not necessarily mean that you would no longer be in a position to contest this adjustment before a court.
Finally, one can only hope that the Belgian tax authorities will take these rulings into account. However, the story does not seem to be over yet. The ink on the Berlin Chemie judgment was not even dry when new requests for preliminary rulings were submitted to the ECJ in relation to the scope of application of an FE for VAT purposes.