CJEU further clarifies the concept of a VAT fixed establishment
The Court of Justice of the European Union (CJEU) issued an important decision on 7 April 2022 (Berlin Chemie A. Menarini SRL), concluding that a subsidiary that provides exclusive marketing and publicity services to a group company acting as a central entrepreneur does not create a VAT fixed establishment of the central entrepreneur in the country where the subsidiary is resident. The decision further clarifies how and when a VAT fixed establishment is created and the ensuing consequences.
A fixed establishment (which is different from a permanent establishment for income tax purposes) is an establishment of a business in a country other than the country where the principal establishment is located. A fixed establishment is characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs. As a general rule, the supply of services is 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 essential 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 established that a subsidiary can be a fixed establishment of its parent company if the requirements for the creation of a fixed establishment are met (for prior coverage, see the article in the June 2021 issue of Indirect Tax News). Nevertheless, the tax authorities of some EU member states have taken the position that a subsidiary is a fixed establishment of its parent company.
Facts of the case
Berlin Chemie (BC) is a German-registered company that holds 95% of a German subsidiary. The German subsidiary, in turn, wholly owns a Romanian subsidiary that carries out services for BC, including marketing services and the promotion of BC’s products in Romania. The Romanian subsidiary also receives orders from BC’s customers and processes invoices. BC is the Romanian company’s sole customer and sells its pharmaceutical products in Romania using the services provided by the subsidiary.
BC paid a monthly fee for the services provided by the Romanian subsidiary, calculated on the basis of the total expenses actually incurred by that company, plus 7.5% per year. The Romanian company invoiced the services provided under the reverse charge, exclusive of VAT, taking the position that the place of supply was in Germany.
The Romanian tax authorities, however, determined that the services were provided to a fixed establishment of BC in Romania because BC had sufficient human and technical resources in Romania to have a fixed establishment there, so the Romanian company should have charged Romanian VAT on the supply of the services. The tax authorities based their decision on the fact that the Romanian company had sufficient technical and human resources to provide regular supplies of taxable goods or services to which BC had continuous access. As a result, the Romanian subsidiary/fixed establishment is both the supplier and the recipient of the supply. The authorities issued a tax assessment that required the Romanian company to pay nearly EUR 10 million in additional VAT, as well as interest and late payment penalties. The taxpayer appealed the decision of the tax authorities and the case was ultimately referred to the CJEU.
Decision of the CJEU
The CJEU concluded that no fixed establishment was created in this case. While the court acknowledged that it is possible for a subsidiary in another EU member state to constitute a fixed establishment of its parent company, this classification depends on whether the requirements for creating a fixed establishment are met and not merely because that company has a subsidiary in another member state. The court reiterated its previous case law where it stated that a subsidiary can be regarded as a fixed establishment only if the material requirements for the creation of a fixed establishment are met, i.e., the company must have a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied for its own needs. According to the CJEU, however, requiring the company to employ the staff and to own the technical resources is too strict an interpretation—it should be sufficient that the company has the right to dispose of the staff and resources as if they were its own (for example, based on employment and leasing contracts).
The CJEU noted that the resources used by the Romanian company to provide the services to BC are the same resources BC used to receive the services. The same human and technical resources cannot be used both to provide and receive the services. The court stated that, while BC did not have its own human and technical resources in Romania—those resources belonged to the Romanian company—BC did have permanent and uninterrupted access to the technical resources (in particular, access to the Romanian company’s computers, operating systems and vehicles) and more than 200 employees (including 150 sales representatives) based on the agreement with the Romanian company and the fact that BC is the sole customer of the Romanian company. Thus, while it follows that BC is most likely the recipient of the services provided by the Romanian subsidiary, it must be established that BC had the staff and technical resources of the Romanian subsidiary at its disposal as if they belonged to BC for it to have a structure with a sufficient decree of permanence to have a fixed establishment in Romania. That is an issue for the referring court to determine.
The CJEU, therefore, referred the case back to the Romanian court to ascertain whether or not BC has a fixed establishment in Romania since it does not have a structure in Romania allowing it to receive the services and use and dispose of the resources used to provide the services as if it owned the resources. Should the Romanian court reach the same conclusion as the CJEU, Romanian VAT will not be due on the supply.
The CJEU decision is welcome in that it provides more clarity on how a fixed establishment determination is made. Parent companies with subsidiaries in another EU member state should be aware that tax authorities may take the position that the subsidiary is a fixed establishment and services received by the parent company or supplied to it are subject to VAT in that other member state.
The CJEU’s decision seems to suggest that the tax authorities cannot take the position that a subsidiary is both the supplier (as a subsidiary) and the recipient (as a fixed establishment) of services. However, there may be situations where the tax authorities can still take the position that a subsidiary is a fixed establishment but only if the parent company can dispose of the staff and technical resources as if they are its own. In our opinion, an important factor is whether the parent company can manage the personnel and whether it can determine how the resources are used in such a way that it can dispose of the personnel and technical resources as if they belong to the parent.