Subsidiary qualified as a permanent establishment of its parent company for VAT purposes
The Spanish Supreme Court ruled on 11 November 2020 in a case where a Swiss company was deemed to have created a taxable presence in Spain for VAT purposes. The Swiss company had used the structure, materials, and human resources of its Spanish subsidiary when performing local sales of goods in Spain. The Swiss company was not established in Spain for VAT purposes and, believing that the reverse charge mechanism was applicable, the Swiss company did not charge VAT for these local sales.
Based on a tax audit, the Spanish tax authorities concluded that the Swiss company was operating in Spain by means of its Spanish subsidiary. Even though the Spanish subsidiary did not assume the risks of the transactions and was not managing its activity independently, the tax authorities found it most significant that the subsidiary followed the instructions of its parent company.
The Swiss company appealed to the Spanish Supreme Court asking for clarification on whether a permanent establishment could be created as a result of the supply of goods instead of services and whether a subsidiary, as an autonomous entity, could be qualified as a permanent establishment for VAT purposes.
Based on the EU VAT Directive, the Spanish VAT Act, and case law from the Spanish Supreme Court and the Court of Justice of the European Union (CJEU), the Swiss company argued that the existence of a permanent establishment becomes of critical importance for companies determining the location of the place of supply of a service and, as a result, the country that should collect the VAT.
But, the Swiss company argued, the existence of a permanent establishment is not as critical when it comes to the sales of goods, given that different rules apply to locating these transactions and, in any event, the local supply of goods will be taxed in the same country, independent of whether the parties have a permanent establishment or not. In the case of the sale of goods, the notion of permanent establishment will affect the determination of the taxable person and whether the reverse charge mechanism comes into play.
Despite the legal arguments presented by the Swiss company, the Spanish Supreme Court concluded that: (i) a permanent establishment could be created by the mere sale of goods, since the notion of a permanent establishment affects more than just the place of supply and the taxable person; it also impacts other VAT-related issues, such as the proper mechanism to request a VAT refund, and (ii) a subsidiary could be qualified as a permanent establishment, even if it is a separate legal entity, if it is entirely controlled by the parent company.