The Court of Justice of the European Union (CJEU) issued a decision on 3 June 2021, in which it confirms that it is necessary to have local staff to have a fixed establishment for VAT purposes.
The case before the CJEU involves Titanium Limited, a company established in Jersey, that is engaged in the business of property and asset management and the management of housing and accommodation. Titanium owned VAT-able real property in Austria, which it leased to two Austrian traders. Titanium hired an Austrian company to carry out the day-to-day management of the property; this company acted as an intermediary between service providers and suppliers, maintained business records, prepared VAT returns, etc. for the property, and provided these services from its premises. However, Titanium retained decision-making power over certain areas, such as deciding on the conclusion and termination of leases, terms of leases, etc.
Under the EU VAT rules, real estate transactions generally are subject to VAT in the member state where the property is located.
Titanium did not charge Austrian VAT on the lease payments it received because it took the position that the property did not create a fixed establishment for VAT purposes and, therefore, VAT should be charged to the Austrian lessees under the reverse charge. The Austrian tax authorities disagreed, concluding that the rented property did constitute a fixed establishment so VAT was chargeable to Titanium for the years at issue. Titanium appealed the tax authorities‘ decision up through the Austrian courts, which eventually referred the case to the CJEU.
The CJEU held that Titanium did not have a fixed establishment in Austria based merely on the fact that it owned and leased out the real property. According to the court, to create a VAT fixed establishment, there must be a certain degree of stability and permanence in the form of human and technical resources to enable the independent provision of services. Having a structure without own staff cannot give rise to a fixed establishment. Although Titanium owned the property, it did not have any of its own staff in Austria and the management company it hired lacked the authority to make important decisions relating to the lease; thus, Titanium did not have adequate human resources in Austria to create a fixed establishment. As a result, the reverse charge is applicable, and the nonresident company, Titanium, does not have to register for VAT.
The Austrian tax authorities’ simplification rule, under which a foreign company that leases out property located in Austria is qualified as a domestic company where the reverse-charge is not applicable, is no longer sustainable. Based on the CJEU decision, foreign companies carrying out business activities in Austria should examine whether or not they meet the requirements to have a fixed establishment in Austria. On a broader level, foreign companies carrying out business activities in any EU member state using staff and/or technical resources also should assess whether they have created a fixed establishment.