The European Court of Justice passes a positive judgment on VAT (fixed establishment)
On 7 May 2020, the European Court of Justice (“ECJ” or “Court”) passed a judgment in case C-547/18 involving Dong Yang Electronics, a company established in Poland, concerning the fixed establishment for VAT purposes. In the judgment, the ECJ held that provisions of Directive 2006/112/EC and the Council Implementing Regulation (EU) No 282/2011 should be interpreted so that:
- the service provider must not infer the existence of a fixed establishment on the territory of a Member State with respect to a company having its registered office in a third country from the mere fact that the company has a subsidiary in said Member State, and
- the service provider is not obliged to carry out checks in order to verify the contractual relations binding the two entities.
The case involved a company established in Poland – Don Yang – which provided PCB assembly services to a counterparty – a company established in South Korea. Don Yang obtained a statement from the counterparty confirming that the counterparty had no fixed establishment in the territory of Poland, and treated the services supplied to the Korean company as not taxable with VAT, according to the general rule whereby the place of service provision to a taxable person is the country of the buyer’s fixed establishment.
At the same time, components for production of the PCBs were provided to Don Yang by the counterparty’s subsidiary established in Poland. Ready-to-use PCBs were delivered to the same Polish subsidiary which, under a contract with the Korean parent, used them to make products which remained the property of the Korean company.
This practice was contested by the Polish tax authority which stated that Poland was the place of provision of the PCB assembly service for VAT purposes because the Korean company used the Polish subsidiary as its own place of business in the country. Moreover, the authority held that it was Dong Yang that should have carried out the checks to determine who the beneficial owner of its services was and such verification would result in determining that it was the Polish subsidiary of the Korean counterparty.
Consequently, the authority requested that Dong Yang pay VAT on the assembly services.
The case was brought before the Wojewódzki Sąd Administracyjny we Wrocławiu (Province Administrative Court in Wrocław), which decided to suspend the proceedings and referred the following questions to the Court for a preliminary ruling:
- Can it be inferred from the mere fact that a company established outside the European Union has a subsidiary in the territory of Poland that a fixed establishment exists in Poland?
- If the first question is answered in the negative, is a third party required to examine contractual relationships between a company established outside the European Union and its subsidiary in Poland in order to determine whether the former company has a fixed establishment in Poland?
In its judgment, the ECJ confirmed that a subsidiary of a third country company may be a fixed establishment of this company in the EU, but it also indicated that to be recognized as a fixed establishment, the company must meet the criteria set out in Regulation 282/2011.
Consequently, the ECJ held that the existence of a fixed establishment cannot be inferred from the mere fact that a company established in a third country has a subsidiary in the territory of any EU Member State. At the same time, the Court also stated, following the opinion of Advocate General, that the service provider cannot be obliged to verify contractual relationships between the parent and subsidiaries, as generally such information is confidential and the obligation to analyse it would mean that the taxable person performs tasks which are required from the tax authorities.
The Court also reminded that the check regarding the fixed establishment should be made according to the provisions of Regulation 282/2011, which include a number of criteria and refer to relations between the service provider and service recipient, and not between the service recipient and entities which may potentially be its fixed establishments.
The judgment in Don Yang case is another one applying to a valid issue of a fixed establishment for VAT purposes. We also remind you that the Austrian case C-931/19 concerning the same issue is awaiting examination.
Given the number of legal criteria and the elaborate body of judgments, determination of the fixed establishment is a very difficult tax-related issue. Moreover, erroneous determination of the fixed establishment may give rise to serious risks for entrepreneurs, and thus each case should be considered separately. Should you have any questions or doubts regarding the issues discussed here, we are ready to help you. Feel free to contact us.