The Court of Justice of the European Union (CJEU) has recently stated in its important decision in the Titanium (C-931/19) value-added tax (VAT) case that own staff is required for a fixed establishment (FE) to be created. In its previous decision in the Dong Yang (C-547/18) case on the concept of FE, the CJEU confirmed that a subsidiary can create an FE for VAT purposes for a parent company established in another country.
Another relevant case is Berlin Chemie (C-333/20) where a long-awaited decision is still pending.
Own Staff Required for a Fixed Establishment: Titanium Case
The CJEU stated in the Titanium case that an entity having its own local staff is required in order to create an FE.
Based on previous decisions by the CJEU it was not clear whether presence of own staff and technical resources is always required to create an FE. In Welmory (C-605/12), the CJEU hinted that personnel and technical resources of another entity are sufficient for an FE to exist and that the resources did not need to belong to the company in order to create an FE of that company. In this case, the Cypriot company used personnel and equipment not belonging to it but to the Polish company.
The CJEU decision could be interpreted as that in order to create an FE, it is not required that a legal entity has its own human and technical resources present in an EU member state if the third party’s resources are used by the entity in this member state in the same way as those of the entity’s own. In addition, the CJEU stated in the Welmory case that digital businesses may not need people in order to create an FE, thus own personnel is not required if the business model does not require it.
In the Titanium case the CJEU states that local staff is required in order to have an FE. This means that contracting staff of a third-party service provider or a subsidiary would not be sufficient for an FE. This also would apply in cases where service could be provided with minimal staff or even without own staff present, such as letting of immovable property.
If the owner of the property does not have its own staff present in an EU member state then this property does not create an FE.
Several EU member states are expected to change their policies as a result of this decision, as discussed below.
Facts of the Case
A company established in Jersey (“Titanium”) owned properties in Austria which it rented out. Titanium did not have its own staff in Austria and appointed an Austrian real estate management company to provide services relating to the property letting. Titanium retained the decision-making power to enter into and terminate leases, to determine the conditions of the tenancy agreements, to make investments and repairs and to organize their financing, to choose third parties intended to provide other upstream services and, finally, to select, appoint and oversee the real estate management company itself.
The Austrian tax authority’s view was that a property which was rented out by Titanium constituted its FE in Austria. The referring court asked whether the existence of human and technical resources is always necessary for an FE to be created.
The CJEU refers to its existing case law (e.g. Planzer Luxembourg, C-73/06 and ARO Lease, C-190/95), and states that the concept of FE “implies a minimum degree of stability derived from the permanent presence of both the human and technical resources necessary for the provision of given services.”
It also refers to Article 11 of Council Implementing Regulation (EU) No 282/2011 (the IR) according to which an FE is characterized by a suitable structure “in terms of human and technical resources.”
The CJEU points out that Titanium did not have any staff of its own in Austria and that the persons responsible for certain management tasks were contractually appointed by Titanium, which reserved for itself all important decisions concerning the letting of the property in question.
The CJEU concluded that a property which does not have any human resources enabling it to act independently clearly does not satisfy the criteria established by the case law to be characterized as an FE for VAT. Consequently, a let property in circumstance where the owner of that property does not have its own staff to perform services relating to the letting does not constitute an FE.
Treatment of This Issue in Different Countries
This decision could have major consequences in EU member states where the tax authorities or courts consider that an FE could exist without its own human or technical resources present in that member state.
In Poland, the tax authorities and courts have ruled that presence of own human and technical resources may not always be required for the existence of an FE. Access to the premises and equipment of third parties and leased staff created an FE in Poland for a non-established entity.
In Germany, courts have held that a wind farm may be regarded as constituting an FE where such a farm has a significant value and has a maximum degree of stability, even if it does not use any human resources.
The U.K. (non-EU) tax authorities have taken a view that a foreign business that owns a property in the U.K. which it leases to tenants has an FE in the U.K. if the company appoints a U.K. agent or representative (such as a subsidiary company acting on its instructions) to carry on its business.
On the other hand, in some member states, e.g. in the Netherlands, the policies and court decisions are already largely in line with the Titanium decision.
Fixed Establishment Not Same as Permanent Establishment
The existence of a permanent establishment (PE) for corporate income tax (CIT) purposes is determined on slightly other grounds than the existence of an FE for VAT purposes, although issues are often similar, for example, whether a dependent agent or a subcontractor acting on the instructions of another company creates a PE.
As an example, in the case of a construction project, a third-party subcontractor acting under direct supervision of a nonresident business could create a PE for this business without any physical presence of the business in the country.
Some EU member states have the same treatment for PEs and FEs. In several EU member states, an FE is considered to exist when a PE exists for CIT purposes although (OECD) rules determining existence of a PE are slightly different from EU VAT rules for FEs.
Implications of CJEU Decision
The CJEU provides important guidance on how the existence of an FE should be determined. Changes are expected in EU member states where the tax authorities or courts have held that an FE could exist without own human or technical resources present in the EU member state.
Subsidiary can be Regarded as a Fixed Establishment: Dong Yang Case
In the Dong Yang case, the CJEU confirmed that a subsidiary can create an FE for VAT purposes for a parent company established in another country. The CJEU refers in its decision to the existing case law (e.g. DFDS (C-260/95) and Welmory (C-605/12)), where it found that a (separate) legal entity could create an FE of another (associate) legal entity.
This would seem somewhat contradictory with the decision in the Titanium case and the Berlin Chemie decision is expected to provide further clarity for businesses.
Facts of the Case
A Korean company (LG Korea) commissioned a Polish undertaking (Dong Yang) to supply assembly services. Assembled (and finished) goods were owned by LG Korea. The Polish subsidiary of LG Korea (LG Poland) was involved in the production by providing necessary materials and information to Dong Yang as well as receiving the assembled products. In addition, LG Poland provided storage and logistics services to LG Korea.
The CJEU refers in its decision to the existing case law (e.g., DFDS and Welmory), where it found that a (separate) legal entity could create an FE of another (associated) legal entity. The CJEU stated that a mere fact that a company from a non-EU country has a subsidiary in an EU member state does not mean that that the subsidiary is an FE of this company.
However, based on the previous CJEU decisions (e.g. DFDS), it is possible that a subsidiary constitutes the FE of its parent company.
The CJEU held that the supplier of the services concerned is not required to examine contractual relationships between a company established in a non-EU member state and its subsidiary established in an EU member state in order to determine whether the former has an FE in that member state.
Specifically, the second subparagraph of Article 22(1) of the IR concerns the contract for the supply of services between the supplier and the taxable person constituting the customer of the services and not the contractual relationship between that customer and an entity which could, depending on the case, be identified as its FE.
Implications and Conclusions
Unfortunately, the CJEU did not provide any new explanation in this decision of the conditions under which a subsidiary can constitute an FE of the parent. Nevertheless, this case could provide more certainty in determining the VAT treatment of similar (toll manufacturing) structures. An FE is not created merely because the parent has a subsidiary in another country.
The CJEU refers in the Dong Yang case to the EU VAT law provisions (the IR) that “must be assessed in the light of economic and commercial realities” and states that a supplier, in determining where its customer is located, should rely on the contractual relationship with its client and is not required to examine the contractual relationships between its client and a parent company of its client.
Treatment of this Issue in Various EU Member States
In Germany, courts have held that the existence of human and technical resources depends on the business sector and may not always be required for the existence of an FE.
In Romania, the tax authorities have taken the position that local toll manufacturing arrangements result in a foreign principal having an FE of the toll manufacturer. Consequently, the Romanian toll manufacturer becomes liable to account for Romanian VAT on the manufacturing services provided to its foreign principal, resulting in the assessment of additional historic VAT liabilities and significant penalties by the Romanian tax authorities.
The tax authorities’ position appears to be based on the principles established in the case of Welmory and presumes that the principal is using the toll manufacturer’s infrastructure in the furtherance of receiving taxable supplies for VAT purposes in Romania.
Another case in this respect is Berlin Chemie (C-333/20). This case concerns a company established in Romania that performs services for its affiliated second-tier parent company established in Germany. At issue is whether the company established in Romania may be regarded as a fixed establishment of the German company. The referring court asks whether this Romanian company is to be regarded as an FE of a foreign parent company if its personnel and technical resources are used entirely for this foreign company.
Practical Implications and Planning Points
The Titanium and Dong Yang decisions are also important for other sectors than property letting or toll manufacturing, for example, for information and communications technology or e-commerce.
The existence of an FE is very relevant for business-to-consumer supplies, but also for business-to-business services (e.g. in place of supply issues, the reverse charge) or even supply of goods (e.g. the applicability of the EU call-off stock simplification).
Businesses need to consider whether there is a risk (or opportunity) that another legal entity in another EU member state could be regarded as their FE.
In some cases, having an FE could provide advantageous; for example, appointing an EU intermediary/fiscal representative is required for non-EU companies in certain situations. However, the existence of an FE in the EU would mean that such intermediary is not required for the entity (e.g. in the case of the Import One-Stop Shop simplification applicable in the EU from July 1, 2021).
The decision in the Berlin Chemie case is expected to provide further clarity for companies operating internationally.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Aiki Kuldkepp is Senior Manager, Tax, with Grant Thornton Netherlands.
The author may be contacted at: email@example.com