Update: The meaning of a “fixed establishment”

Dong Yang Electronics Sp. z o.o. (Case C-547/18) – Supplies held to have been made to the overseas parent and not its local subsidiary

Summary

Article 11 of EU Regulation 282/2011, consistent with established CJEU jurisprudence, provides that for a fixed establishment to exist, it must have a sufficient degree of permanence and a suitable structure in terms of human and technical resources to receive and use the receive services for its own needs.

On 7 May 2020, The CJEU’s decision in Dong Yang Electronics Sp. z o.o. (Case C-547/18) followed the AG’s opinion (which we previously covered here). It held that the taxpayer correctly treated its services as supplied to the business establishment of the customer (the non-EU parent company), and not to the customer’s EU subsidiary, alleged to be its fixed establishment. We discuss the steps that businesses must take in determining which establishment of their customer, and in which location, their services should be treated as supplied to. Where the relevant establishment of the customer is in the supplier’s jurisdiction, local VAT must be accounted for.

The facts

• Dong Yang Electronics Sp. z o.o (Dong Yang) (based in Poland), provided services of assembling printed circuit boards to LG Display Co. Ltd. (LG Korea) (based in South Korea).
• LG Korea’s subsidiary, LG Display Polska sp. z o.o. (LG Poland) (based in Poland), provided the necessary materials to Dong Yang to perform the services.
• LG Korea assured Dong Yang that it did not employ staff, and had no human or technical resources in Poland or a fixed establishment in Poland. Dong Yang therefore did not charge Polish VAT on its services.
• The Polish tax authorities considered that VAT was due as LG Poland was a fixed establishment of LG Korea, and LG Poland was the establishment to which Dong Yang’s services should be treated as supplied.

The decision

The CJEU acknowledged that a parent/subsidiary relationship does not automatically result in the subsidiary being a fixed establishment of the parent (although, depending on the facts, this could be the case). Equally, a supplier cannot simply accept the customer’s assurance that it does not have a fixed establishment. The supplier must exercise a reasonable degree of care in undertaking the tasks set out in Article 22 of Implementing Regulation No 282/2011, to determine the establishment of its customer to which its services are provided.

Step 1: The supplier must examine whether the nature and use of the service provided to the customer identifies the fixed establishment.

Step 2: If not, then the supplier must examine whether (i) the contract, (ii) order form, and (iii) the VAT number of the customer points to the fixed establishment, and (iv) whether the fixed establishment is paying for the services. The supplier, however, need not undertake extensive investigations.

If the supplier still cannot identify the fixed establishment of the customer after following these steps, the supplier may treat its services as being supplied to the customer’s business establishment.

These are sensible steps which do not involve exhaustive enquiries into potentially sensitive business practices of the customer.

Next steps

Businesses supplying goods or services to overseas customers which may, to some degree, involve a customer’s local branch or subsidiary, must make the appropriate enquiries to establish whether and to what extent a customer’s branch or subsidiary, particularly a local one, is involved, so it can apply the correct VAT treatment. Evidence should be retained of the enquiries made. Businesses that do not follow the steps above and rely solely on their customer’s assurances may be exposed to a risk of challenge by tax authorities. This can lead to additional VAT, penalties and interest being payable.

Can a fixed establishment exist without human or technical resources if none are needed? Titanium Ltd (C-931/19)

Case law and Article 11 of Implementing Regulation 282/2011 states that a fixed establishment requires both human and technical resources. Austria’s referral to the Court of Justice of Titanium Ltd (C-931/19) seeks to establish whether a fixed establishment can exist without human or technical resources.

According to the request for the preliminary ruling, Titanium Ltd is an overseas owner of Austrian real property. It has none of its own human resources locally and engaged an independent real estate manager to manage the property. It contends that within the meaning of established EU law, the leased property cannot be considered as its fixed establishment as it does not have any of its own local personnel. Accordingly, it is the lessee that is required to account for VAT under the reverse charge.

The Austrian tax authority’s view, which is set out in its published guidelines, is that a leased property can always be treated as a fixed establishment. Its view is also supported by German tax courts, which have held that human and technical resources will always have slightly different compositions, as each business requires different amounts of manpower and other resources. Therefore, the regular absence of one of the elements does not necessarily invalidate the assumption of a fixed establishment. Under guidelines of the German tax authorities, non-domestic taxable persons who own a property located in Germany and collect rent subject to VAT “are to be treated in this respect as resident in Germany” and consequently must register for VAT and submit VAT returns in Germany. The lessee hence would not account for any VAT on a reverse change basis.

In contrast, the UK, Netherlands and Italy broadly adopt the same approach. In the UK, paragraph 3.5 of VAT Notice 741A confirms HMRC’s view that real property in the UK alone cannot be considered the fixed establishment of its overseas owner. However, a fixed establishment can exist where the overseas business owner “appoints a UK agent or representative (such as a subsidiary company acting on their instructions) to carry on its business.”

In the Netherlands, the Dutch Supreme Court in early 2019 considered a very similar situation involving overseas owners who had leased their Dutch vacation home through an independent local property manager. The Court ultimately held that the leased property did not constitute a fixed establishment as there was no appropriate structure in place to render leasing services. The manger had acted as an independent intermediary. Its activities (and by extension its personnel) therefore could not be construed as the owners’ activities to be considered a fixed establishment in the Netherlands.

Finally, in Italy, its Supreme Court held that an Italian property merely owned by a foreign entity does not per se constitute a fixed establishment. In accordance with CJEU rulings, it held that the property itself could not be deemed its Italian fixed establishment without both human and technical resources necessary for the provision of the lease service itself. A fixed establishment rendering lease services could arise, however, if there was a close connection between the leased property and the business activity carried on in Italy through a person engaged locally by the foreign entity.

A developing area - we can help

This is clearly a developing area of VAT, as particularly with technology becoming more and more sophisticated, the question is being asked about what “suitable” human and technical resource means in different scenarios. The different jurisdictional views set out above indicate that advice may be necessary to navigate this difficult area. It is critical to cover any uncertainties in the documentation. Please get in touch with any member of DLA Piper’s International Indirect Tax team. We would welcome the opportunity to assist you.