Today, the Court of Justice of the European Union (CJEU), released its judgment in the highly anticipated Berlin case(C-333/20) on the controversial fixed establishment ("FE") topic.
In this case, the EU court received another opportunity to deal with the burning question: can a locally established and formally independent entity constitute a FE of another taxable person? The case was delivered without the opinion of an Advocate-General, which only occurs when the judgment does not raise any new questions of law.
This case is another important milestone in the Fixed Establishment (FE) saga.
The Berlin case is about a Romanian company, Berlin Chemie A. Menarini SRL (BCAM), supplying services to Berlin Chemie AG (BC) in Germany. The services concerned marketing, regulatory, advertising and representation activities.
BCAM (sub-subsidiary of BC) considered the services to be taxable in Germany, but the Romanian authorities disagreed. Instead, they argued that BC - through the presence of its subsidiary - had sufficient (human and technical) resources to create a Romanian FE.
Therefore, in the view of the authorities, BCAM’s service deliveries to BC should have been subject to Romanian VAT. The dispute finally ended up in the court, where CJEU was asked to address the following questions:
- For BCAM to be considered as FE established, is it necessary for the human and technical resources employed by BCAM to belong to it, or is it sufficient for BCAM to have immediate and permanent access to these resources through another affiliated company (BC) which it controls through a majority shareholding?
- Is it necessary for BCAM’s presumed FE to be directly involved in decisions relating to the taxable sales, or is it sufficient for BCAM to have technical and human resources that are made available to it through contracts concluded with third party companies for marketing, regulatory, advertising, storage and representation activities which are capable of having a direct influence on the volume of sales?
- Can BC be regarded as a service provider for BCAM’s FE (created by having immediate and permanent access to the technical and human resources of BC)?
Basically, it all comes down to the question whether a non-resident company using the resources of an affiliated company may be considered as having a FE.
The CJEU started by reminding us of the principle that the place of main establishment is the most useful connecting factor and that this should be the primary point of reference for deciding where services should be taxed for VAT purposes. The “FE” location can only by way of derogation be considered, and provided that certain conditions are met.
According to the CEUJ, control over a local subsidiary or ownership is not sufficient to create a FE for VAT puposes. Hence, a separate entity, such as a subsidiary, does not automatically give rise to a FE of the controlling entity. The FE assessment should, however, be done in the context of the economic and commercial reality. In this respect, it is not necessary for the FE test to own the resources, but there should be control over these resources in the same way as an “owner” . While this assessment is left to the national court, the CEUJ provided useful additional guidance.
The FE is characterized by a suitable structure to enable businesses to receive and use services supplied to them for their own needs and not by the decision power of a certain structure that businesses have put in place.
Furthermore, a distinction should be made between services supplied by the Romanian (BCAM) and the German (BC) companies, since both are engaged in different activities; performing separate supplies, being subject to their own specific VAT regimes.
In the case at hand, the resources made available by BCAM (RO) to BC (DE) company, which the Romanian authorities consider as an FE, were also those through which BCAM was enabled to supply services to BC. In this respect, CEUJ pointed out that the same means cannot be used for providing and receiving the same services.
Therefore, in the court’s view, the services provided by BCAM (RO) were received by BC (DE), which has used its "own human and technical resources in Germany" to execute sales contracts with distributors in Romania.
As a result, based on the fact pattern of the case, the CEUJ concludes that the German company (BC) does not have a suitable FE structure in Romania.
Businesses are currently exposed to legal uncertainty when dealing with FE exposures. One of the most crucial consequences of having a FE is that services delivered in a cross-border context result in VAT payment liabilities.
The extensive case law in the FE area illustrates that it is of the utmost importance for business to verify, based on the factual circumstances/their business model, whether their structure led to the existence of a FE.
After the earlier disappointing CEUJ judgements, i.e., Welmory (C‑605/12) and Dong Yang Electronics (C-547/18), we have seen a higher number of litigations in quite some jurisdictions where EU tax authorities were considering a presence through local affiliates as a (FE) establishment for VAT purposes.
The CEUJ now clearly rules that a non-resident cannot be considered to have a FE solely by having direct and permanent access to resources of affiliated entities.
Since earlier CJEU rulings left the door wide open for tax authorities to consider these affiliates as FE’s, the outcome of this case should be considered as a positive development for businesses when dealing with their FE challenges.
Given the current FE litigation across EU and in Belgium (e.g., Court of Appeal of Liège; 22 October 2021, 2020/RG/765), this CEUJ ruling will provide additional supporting arguments to challenge the position of local VAT authorities in the pending litigations.
