What is fixed establishment? Fixed establishment (further FE) means permanent place of business. Value Added Tax Act does not define clearly this issue, however in Article 11 of Council Regulation (EU) No. 282/2011 can be found that ,,fixed establishment stands for any place – other than the place where the taxpayer’s business is established which is characterised by sufficient permanence and an adequate structure in terms of staffing and technical facilities to enable it to receive and use the services provided for its own needs from this permanent place of business.”
Why is it so important?
Permanent place of business enables among others effective intake of tax without prejudicing the interests of individual members of the European Union. It concerns the situation when entrepreneur has an increased involvement in the economy of another Member State (other than his country of establishment) which triggers an obligation to account for VAT in that country. It means that having fixed establishment on the territory of another Member State, makes it necessary the performance of the taxed activities in question, taking into account the VAT regulations of the country concerned.
Why the doubt?
The doubts in issue of specify permanent place of business concern notably the problem in defining the constancy of staff and technical facilities and their structure. This case has often been the subject of dispute between the taxpayer and tax authorities. Court of Justice of the European Union (hereinafter CJEU) and national courts had bent over backwards on the FE issue frequently, with the following judgments, a.o.:
- C-333/20 Berlin Chemie
- C-547/18 Dong Yang Electronics
- C-605/12 Wellmory
- C-931/19 Titanium
- I FSK 968/20 – Judgment of NSA
C-333/20 – Berlin Chemie - Direcţia Generală Regională a Finanţelor Publice Bucureşti
In 7th April 2022, CJEU passed judgment in case C-333/20, regarding the fixed establishment for VAT purposes. In the dispute were involved a German company Berlin Chemie A. Menarini SRL and a Romanian Administraţia Fiscală pentru Contribuabili Mijlocii Bucureşti – Direcţia Generală Regională a Finanţelor Publice Bucureşti.
Berlin Chemie AG is company based in Germany, selling pharmaceutical products in Romania. The company has entered into a marketing and advertising agreement with the Romanian subsidiary, established in this country, under which the subsidiary undertook to promote products in Romania. Invoices for provided services, according to the reverse charge, did not included VAT tax due the place of supply of these services was Germany. However, the tax authority, as a result of the audit, found that services rendered to Berlin Chemie AG should be taxed in Romania, where is subsidiary’s permanent place of business. The decision was taken due the fact that German company had unrestricted access to the Romanian company's technical and personnel facilities, enabling it to supply goods and provide services in Romania. Tax authority issued a tax decision requiring the Romanian company to pay tax on services rendered, together with interest. The subsidiary disagreed with the State Treasury’s position and lodged a complaint to court of appeal in Bucharest, disputed the issue of having fixed establishment by Berlin Chemie AG in the territory of Romania. As a result of the doubts in this regard, the case finally went to the CJEU.
The Court of Justice of the EU, recalling the interpretation of Article 44 of Council Directive 2006/112/EC of 28th November 2006 on the common system of value added tax, as amended by Council Directive 2008/8/EC of 12th February 2008, and Article 11 of Council Implementing Regulation (EU) No 282/2011 of 15th March 2011 laying down measures for the implementation of Directive 2006/112/EC, pointed out, "a company established in one Member State does not have a permanent establishment in another Member State by virtue of the fact that it has a subsidiary there which makes available to it human and technical resources on the basis of contracts under which that company provides on an exclusive basis marketing, regulatory, advertising and representation services which may have a direct effect on sales volumes.". In arguing the judgment, the CJEU also referred to previous fixed establishment cases, including the judgment in the Polish Dong Yang Electronicts case (C-547/18) and the Planzer Luxemborg case (C-73/06).
In the court's opinion, the existence of a fixed place of business is not conditioned by only availability to human and technical resources, because the entity providing does not participate directly in taxable activities carried out by the beneficiary of the resources. Additionally, court confirmed that this resources could not be using to provide and purchase the same services at the same time. In the case at hand, the resources that were supposed to be the permanent place of business of Berlin Chemie AG were at the same time used by the Romanian subsidiary to provide services to the parent company.
This is another judgment in recent years, which clarifies possible taxpayers’ doubts as regards the determination of the existence of a fixed place of business. This issue is particular relevance for taxpayers using the services of subsidiaries in EU countries, because represents an important step towards guaranteeing certainty of taxation for this type of service. It is also significant that there is a growing number of positive judgments that provide arguments in disputes with tax authorities, which continue to represent a relatively restrictive approach to this issue.
C-547/18 Dong Yang Electronics - Director of the Tax Administration Chamber in Wrocław
Dong Yang Electronics company has entered agreement with the Korean company LG Display Co. Ltd., about service provision of tile PCB installation from materials and components owned by LG Korea. According to the agreement, Dong Yang Electronics was receiving materials needed to make the tiles from LG Korea subsidiary, LG Display Poland Sp. z o.o. After assembly, the products were then transferred to the Korean company for the production of electronic modules. At finally process, modules were transferred to other company, LG Display Germany GmbH.
Company Dong Yang Electronics was issuing invoices on LG Korea for services which, in their opinion, were not subject to VAT on Polish territory. This decision was supported by the fact that LG Korea has not fixed establishment, no employees and technical facilities in Poland. Both LG Korea and Polish subsidiary have separate numbers of VAT identification.
However, Director of the Tax Administration Chamber in Wrocław stated that the Korean company was using LG Poland as its own place of business. And that Dong Yang Electronics instead of relying solely on statements by LG Korea, according to which the latter company had not a permanent place of business in Poland – should have, in accordance with Art. 22 of Implementing Regulation No. 282/2011, studied who was the actual beneficiary of the services it provided, and such an analysis would have proved that this actual beneficiary was LG Poland.
This is where arise a doubts about the existence of a fixed place of business through not only the existence of the subsidiary but also the contractual relationship between the parent company and the subsidiary. Additionally, court of reference stated due to fact that registered office of LG Korea is in a third country, it means Republic of Korea, the company cannot enjoy the freedoms granted by the EU Treaty and freely conduct business in the Republic of Poland.
The Court of Justice of the EU stated that Art. 44 of Directive 2006/12 and Art. 11(1) and 22(1) of Implementing Regulation No. 282/2011 must be interpreted as meaning that Don Yang Electronics cannot derive the existence of a permanent place of business in the territory of a Member State of a company established in a third country from the mere fact that that company has a subsidiary in that Member State, and it is not required to examine, in order to make such an assessment, the contractual relationship between the two entities.
In conclusion, Dong Yang Electronics has provided services for LG Korea, using resources which provided them subsidiary – LG Poland. Company was issuing non-taxed at the national rate on Korean entity although, according to the tax authorities, it should had been issuing them to LG Poland, which have registered office in Poland and that means already involves charging VAT on the services provided. In judgement CJUE confirmed a position’s Dong Yang Electronics that company has the right to issue tax-free invoices on Korean company. Also it confirmed that there were no grounds to question LG Korea's statement regarding the determination of the beneficial owner of the services provided by Dong Yang Electronics.
C-605/12 Wellmory sp. z o.o. - Director of the Tax Administration Chamber in Gdańsk
Wellmory LTD company, placed in Nicosia in Cyprus, has entered into a cooperation agreement with the Polish company on the basis of which the first company undertook to provide the second company with the service of making available an auction website under a domain name www.za10groszy.pl, also includes the provision of accompanying services related, firstly, to the lease of the servers necessary for the operation of the site and, secondly, to the listing of products in the auctions. The Polish company undertook mainly to sell goods through this site. The agreement was concluded on 2 April 2009. A year later, the Cypriot company acquired 100% of the share capital of the Polish company. During the term of the contract, prior to the time of acquisition, the Polish company issued four invoices for services rendered to the beneficiary. These invoices were not taxed because the company believed that the services were provided at the recipient's premises and should consequently be subject to VAT in Cyprus.
However, Director of the Tax Chamber in Gdańsk considered that the services provided should be deemed to be for the benefit of a fixed place of business, and therefore be taxed at 23%, in accordance with Article 28b(2) of the VAT Act. One of the arguments was that the two companies form an economically inseparable whole and that the objective of the whole project is only achieved in Poland with the cooperation between them. In addition, he concluded that Cypriot company used of technical and personally facilities of Polish company.
The Supreme Administrative Court noted, however, that the Court's jurisprudence on the concept of habitual place of business concerns legal and factual situations different from the situation considered by it in the main proceedings. The doubts were mainly about the recognition of the final place of taxation of the digital goods, the so-called ,,bids” sold by the Cypriot company to customers in Poland.
The Court of Justice of the EU stated that for the purposes of Article 44 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2008/8/EC of 12 February 2008, a Cypriot company should be deemed to have a fixed place of business in Poland, because the place in question is characterised by sufficient stability and an adequate structure in terms of staffing and technical facilities to enable receipt of services and use them for the purposes of its economic activity, which it is for the referring court to examine.
C-931/19 Titanium Ltd – Finanzamt Osterreich
Titanium company, based on and has a board of directors on the island of Jersey, carries out real estate management activities. Between 2009 and 2010, company leased property which owned to two Austrian entrepreneurs. At the same time, authorised the Austrian real estate management company to act as an intermediary with service providers and suppliers, to invoice rent and running costs, and to keep business records and prepare VAT return data. These services were performed by an attorney at premises other than those owned by Titanium. The English company, on the other hand, retained decision-making powers to conclude and terminate leases, determine the economic and legal terms of leases, make investments and repairs, and organise their financing. In this factual context, Titanium considered that is not obligation to pay VAT on its activities involving rental of real estate, due to that company has not a permanent place of business in Austria.
Austrian tax authority disagreed with this assessment and considered that the rented property constituted a permanent place of business, and consequently they determined the amount of VAT, which Titanium should paid for tax years 2009 and 2010. The case finally went to the Court of Justice of the EU, to which the Federal Court of Finance decided to refer a question for a preliminary ruling.
In the CJEU's opinion, the rented real estate cannot be a permanent place of business in this situation due to the lack of presence of a staff resource. They supported his decision with Article 11 of Council Implementing Regulation (EU) No 282/2011 of 15.03.2011 laying down implementing measures for Directive 2006/112/EC, according to which the permanent place of business is characterized specifically in ,,an appropriate structure in terms of staffing and technical facilities”. The Court noticed also that from the file in the present case it is clear that Titanium company has not any staff of their own in Austria and the people responsible for certain management tasks were contractually authorised by that company, which clearly does not meet the criteria established in the case law for recognition as a fixed place of business.
I FSK 968/20 – Judgment of NSA
Subject of judgment was dispute in connection with the issuance of an individual interpretation by the Director of National Fiscal Information (hereinafter NFI) of 2nd September 2019, sign. 0115-KDIT1-2.4012.353.2019.2.KK.
On 1st May 2018, the Polish company A. with the German company B., an active VAT taxpayer registered for VAT purposes in Poland, has entered a warehousing contract governing the company's storage transactions for B. The agreement was related to profiles of activities both entities. Company A. is active in warehousing and storage of goods, while company B. sells spare parts for cars and motorbikes in an e-commerce formula, directly to the customer. German entity does not recruit any staff in Poland and also has not a people authorised to enter into contracts with clients and negotiate essential elements of them on its behalf. Any key decisions, related to business activities of company B. in Poland, are taken at its head office i.e. in Germany. In the absence of relevant infrastructure in terms of personal and technical facilities sufficient to business activity, company A. believes that the German entity has not a permanent place of business.
Director of NFI disagreed with the position of the Polish entity. One of the arguments was fact that German company has de facto authority over technical and personnel facilities in Poland and can use them appropriately in the distribution of its goods. Meaning that the service provides by company A. in favour of the company B. should be taxed in Poland.
The company A. therefore lodged a cassation appeal with the Chief Administrative Court (hereinafter the CAC). This court entered a judgment in favour of Polish company. In their opinion the circumstances presented in this case does not indicate the existence of fixed establisment. In argumentation they referred to the CJEU’s judgment from 7th April 2022 in Berlin Chemie case (sign. Act C-333/20), considered that for the company B. to be considered to have a permanent business of place, then it should have a structure in Poland characterised by sufficient constancy. Additionally, this structure would have to allow for the receipt of services provided by the company A. and using them for own demands of business activities on territory of Poland.
Besides, CAC also pointed out that the company B’s fixed place of business could not be said to be, if the same technical and personnel facilities, to be shared to company B. by company A. are also the facilities through which company A. provides services to company B. Indeed, the same personnel and technical facilities cannot be used simultaneously to provide and receive the same services.
The issue of permanent place of business continues to be hotly debated and analysed by companies, as it determines the place of taxation services by VAT tax. The consequences of the lack of awareness FE might be very costly for the company providing the services, as it can lead to tax arrears and interest. Therefore, one way of protecting company from inappropriate taxation of transactions and tax implications is requesting an individual interpretation before commencement of taxable activities. An essential element is a thorough analysis of the facts and always verifying the taxpayer's situation, as it would be different from the aforementioned court judgments and thus lead to different conclusions and positions of the authorities.
