BDO Indirect Tax News

European Union - CJEU rules again on when a subsidiary can be considered a fixed establishment

The Court of Justice of the European Union (CJEU) has ruled in several cases on whether a subsidiary can constitute a fixed establishment for VAT purposes, specifically in situations where manufacturing or other types of services are outsourced to a related company located in another EU member state (for prior coverage, see the article in the July 2022 issue of BDO’s Indirect Tax News).

This issue was raised again in the SC Adient case, in which the court largely repeated its previous conclusions, but in its decision released on 13 June 2024, the court offers some new perspectives on the matter. The CJEU confirmed that a fixed establishment cannot be created by companies that simply belong to the same group or are linked through a contractual services agreement. An exclusive services contract does not, in and of itself, mean that the service provider's resources become those of its customer, unless based on the contract, it can be shown that the provider does not remain responsible for its own resources and does not provide services at its own risk.

A fixed establishment is an establishment of a business in a country other than the country where the principal establishment is situated. A fixed establishment is characterised by a sufficient degree of permanence and structure in terms of human and technical resources to enable it to receive and use services supplied to it for its own needs. The supply of B2B services is generally subject to VAT in the country where the customer is established, but if a fixed establishment purchases the services, the place of supply is the country where the fixed establishment is located. It is therefore important to determine whether a subsidiary is a fixed establishment.

Fixed establishments and subsidiaries are treated differently for VAT purposes: a fixed establishment is part of the same VAT entrepreneur, whereas a subsidiary is a VAT entrepreneur separate from its parent company (for prior coverage, see the article in the October 2020 issue of Indirect Tax News). Supplies between a fixed establishment and its head office generally are not subject to VAT but supplies between a parent company and its subsidiary are VATable. The CJEU has previously held that a subsidiary can be a fixed establishment of its parent company if the requirements for the creation of a fixed establishment are met.
Facts of the case
The SC Adient case involved two group companies: Adient Germany and Adient Romania. Adient Romania manufactures and assembles upholstery parts for car seats on behalf of Adient Germany and provides support services, such as receiving, storing, inspecting and managing raw materials and storing finished products. Adient Germany remains the owner of raw materials, semi-finished and finished products at all times and it sells the car seats.

The companies took the position that Adient Romania provided services to Adient Germany, which were VAT taxable in Germany and on which the VAT was reverse charged. However, the Romanian tax authorities disagreed and considered that Adient Romania is a fixed establishment of Adient Germany because the German company had sufficient rights to direct the Romanian company’s staff and resources; thus, the services should be subject to VAT in Romania.
Decision of the court
The CJEU first reiterated its conclusion in previous decisions that a subsidiary can constitute a fixed establishment for VAT purposes. However, a fixed establishment does not arise simply because there is a subsidiary or because two companies belong to the same group or because one company exclusively provides services to another company. A fixed establishment will be present only if a company has permanent access to personnel and resources to carry out or purchase services or if the relevant contracts demonstrate that the recipient of the services actually directs the staff and resources of the service provider as if they were its own, which will be the case if—on the basis of the contract—the service provider loses responsibility for its own resources and does not provide the services at its own risk.
In the instant case, the CJEU held that it cannot be presumed that Adient Germany has a fixed establishment in Romania on the grounds that:
  • The group companies have the same IT and accounting system;
  • The employees have access to the accounting system to directly record raw materials and finished products delivered; and
  • Adient Germany has storage facilities for the products and raw materials.
It is up to the Romanian court to determine whether the employees are subject to the authority of Adient Romania or Adient Germany. That court must also ascertain whether the activities carried out by Adient Romania’s employees relate solely to processing services or are of a purely administrative nature.

The CJEU pointed out that staff and resources cannot simultaneously be customers (as a fixed establishment of Adient Germany) and service providers (as a subsidiary of Adient Germany).
BDO's view
In our view, the precedent established by the CJEU's previous decisions was already clear that a subsidiary does not automatically (or easily) constitute a fixed establishment. However, the court’s decision in Adient provides some additional guidance on when a subsidiary does or does not constitute a fixed establishment.

As noted above, the fact that two companies use the same resources (IT and accounting systems) does not result in a fixed establishment. It also follows that if the staff are under Adient Germany’s authority, it can direct them as if they were its own staff. The fact that the employees are not solely involved in the processing and support services could also indicate that Adient Germany has the staff at its disposal. It is up to the Romanian court to decide whether this is in fact the case.

Using the CJEU’s decision as guidance, companies carrying out business activities in any EU member state using staff and/or technical resources should assess whether they have created a fixed establishment.

Madeleine Merkx
BDO in Netherlands
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