The Court of Justice of the European Union again remarked on a fixed establishment

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Karolina BARTKOWIAK
Tax Supervisor w RSM Poland
 

The Court of Justice of the European Union (hereinafter also: the CJEU or the Court) issued a judgement on 7 April 2022 in the case of a Romanian company, Berlin Chemie A. Menarini SRL with the participation of a German parent company, Berlin Chemie AG (ref. C-333/20), which may be of considerable importance for the correct understanding of the concept of a fixed establishment in terms of goods and services tax.

CJEU ruling in case C-333/20

The facts in this case concerned a Romanian company based in Bucharest, whose main activity is public relations and communication counselling.

The sole recipient of the services of this Company was the related German company Berlin Chemie AG. The sole shareholder of the Romanian company was Berlin Chemie/Menari Pharma GmbH with its seat in Germany, 95% shares of which belonged to Berlin Chemie AG.

The above links mean that there was undoubtedly some kind of dependency between the service provider (Berlin Chemie A. Menarini SRL) and the service recipient (Berlin Chemie AG).

When operating for a German company, the Romanian Company did not add VAT to the price of its services, assuming that it provided them to an entity based outside Romania (in Germany). The settlement was therefore based on a reverse charge, at net price, with the obligation to settle the tax lying with the buyer (in Germany).

However, the Romanian tax authorities found that the German company (recipient/buyer of the service) has a fixed establishment in Romania. This was to be due to the fact that the Romanian company had personnel and technical facilities at its disposal.

Under such a scenario, the Romanian Company would provide services to the German company’s fixed establishment in the same country (in Romania), which would result in the obligation to add Romanian VAT to the net price.

What is a VAT fixed establishment?

At this point, it is worth recalling what a fixed establishment is.

According to the CJEU jurisprudence, a fixed establishment is any place, other than the place of business, that is characterised by sufficient permanence and appropriate structure in terms of human and technical resources to enable it to receive and use the services provided for its own needs in that fixed establishment.

This concept simply assumes that in a country other than the country of residence of a given taxable person, there may be a fixed place of business, capable of both using external services for its own purposes and generating a specific added value. Such a situation may mean that the consumption of certain goods or services should be taxed in the country where such fixed establishment exists, and not in the country where the taxable person is established. In the last few years, however, serious doubts have arisen as to whether such a fixed place of business can be someone’s subsidiary (and therefore basically a completely separate entity and taxpayer).

Fixed establishment in a member state

In this context, in the judgement under the examination of 7 April 2022, the Court reiterated that the existence of a fixed establishment in the territory of a member state of a company established in another member state cannot be deduced solely from the fact that the company has a subsidiary in that member state (see: to that effect, a judgement of 7 May 2020, Dong Yang Electronics, C 547/18, EU:C:2020:350 (33)).

Moreover, the CJEU pointed out that the premise of the existence of sufficiently permanent human and technical base should be assessed in the context of economic and commercial reality.

Although it is not a requirement for a taxable person itself to own the human or technical resources, it is however necessary for that taxable person to have the right to dispose of those human and technical resources in the same way as if they were its own – on the basis, for example, of employment and lease contracts which make those resources available to the taxable person and cannot be terminated at short notice.

Moreover, the CJEU indicated that the taxable person’s fixed establishment is characterised by sufficient degree of permanence and an appropriate structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs. And it is this premise (i.e. the possibility of receiving and using services supplied to it for its own needs) that may be of importance for the jurisprudence of Polish courts and tax authorities, which so far have rarely focused on this circumstance.

It was also noticed that the human and technical base should be sufficient to receive services provided by another entity, as one and the same base cannot provide services for itself.

Importance of the CJEU ruling for taxpayers

In this specific case, the CJEU found that, in light of the presented facts, the German Company does not have a fixed establishment in Romania, as it did not have a dependent structure in that member state that would allow it to receive services in that country by the Romanian company and use them for the purposes of business activity.

The judgement of the CJUE and the consideration contained therein may therefore strengthen the argumentation of taxpayers in disputes with Polish tax authorities, which increasingly qualify certain facts as a symptom of a fixed establishment of foreign entities being created in the territory of Poland.

It should be noted that this problem is of significant practical importance, as it affects not only the legal and tax situation of foreign entities, but also – and perhaps most of all – the correctness of settlements of entities that cooperate with them. If a foreign entity does not have a fixed establishment in Poland, the place of taxation of the provision of services will be the country of the service recipient’s seat. On the other hand, the provision of services to a fixed establishment in Poland means that this transaction should be subject to VAT in Poland.

If you would like to take advantage of individual advice on the risk of creating a fixed establishment in Poland – please contact us.