Multiple litigations related to the recognition of value-added tax (VAT) fixed establishments are currently pending in various EU member states.
Because of the context and factual circumstances of the Dong Yang case, as well as the promising conclusions from Advocate General Kokott, the decision from the Court of Justice of the European Union (CJEU) was expected with much impatience. The decision could, at first sight, look disappointing, but it is more decisive than it seems.
In Belgium and other EU member states, multiple litigation started over the last few years around the question of the existence of VAT fixed establishment.
The Belgian VAT authorities, particularly, are challenging a broad range of situations. Among these, the Belgian VAT authorities typically claim the payment of Belgian VAT, as well as penalties and late payment interests, to Belgian services companies having concluded toll manufacturing, logistical or other services agreements with a foreign (group) company.
In these cases, the Belgian VAT authorities argue that the foreign company (recipient of services) has a Belgian fixed establishment through (one of) its Belgian subsidiary and that this fixed establishment is using the services supplied. In many cases, the Belgian VAT authorities are targeting pure intragroup situations where the services company is a group company (subsidiary or not) and sometimes pretend that the services company itself (i.e. its infrastructure) is deemed to constitute the fixed establishment.
The decision in the Dong Yang case, dealing with the question of the place of supply of toll-manufacturing services, was consequently expected with much impatience by companies entangled in litigation regarding the potential presence of a fixed establishment in Belgium, but also in numerous other member states.
In November 2019, the conclusions of Advocate General Kokott were promising. The decision was issued by the CJEU on May 7, 2020.
With a closer look at the decision and the conclusion of the Advocate General, this case law could prove to be more decisive than initially thought.
Decisive Decision for Third-Party Service Providers and Intragroup Situations
The more interesting part of the decision relies in the answer of the CJEU to the second question referred by the Polish court.
Considering the concise character of the answer provided by the CJEU, it is important to be reminded of the exact terms of this question: “… is a third party required to examine contractual relationships between a company established outside the European Union and its subsidiary in order to determine whether the former company has a fixed establishment in Poland?”
In other words, the referring Polish court is not asking what elements need to be taken into account in order to determine whom, from the parent company or its fixed establishment, is receiving the services (which is inferred by the various references to Article 22 of the Implementing Regulation no. 282/2011). The question from the referring Polish court relates to a preliminary step in the analysis, being: “how can the service provider determine that the subsidiary of its customer constitutes the fixed establishment of that customer?”
The answer from the CJEU is clear (even if the reference to Article 22 of the Implementing Regulation does not seem appropriate): “the service provider can only rely on information it has access to and shall not seek to obtain details on the contractual relationship between its customer and the subsidiary thereof.”
Yet, if the CJEU (contrary to the Advocate-General) is not rejecting the possibility that a subsidiary could constitute a fixed establishment of its parent company, it has to be noted that the CJEU only refers to the DFDS case in this respect (see point 32 of the decision) and more particularly to points 25 and 26 of this case.
Point 26 of the DFDS case law introduced the possibility to consider a subsidiary as the fixed establishment of its parent company if that subsidiary acts as a mere auxiliary organ of the parent company. The question is now: how can a services provider determine that the local subsidiary of its customer is acting as its mere auxiliary organ without having access to contractual documents between those two entities? It is clearly impossible.
So, the CJEU seems, after all, to join the Advocate-General who stated that: “the DFDS decision concerned the opposite case of the place of supply of services by the parent company or subsidiary and not the receipt of the service by a third party (…) The reference to an auxiliary organ acting for the parent company is not applicable in the present case.”
A service provider is in an impossible situation to determine whether a local subsidiary (or, a fortiori, any another local group company) of its customer is acting as a mere auxiliary organ and therefore constitutes a fixed establishment thereof. The service provider can consequently rely on the contract concluded and invoice its customer at his place of business.
The Dong Yang case should consequently be quite rapidly closed in favor of Dong Yang as a third-party supplier. Third-party suppliers in general have found a decisive argument with the Dong Yang decision. The same should also be true in most intragroup situations.
As mentioned above, some pending litigation in Belgium relates to services companies which are considered by the Belgian VAT authorities as constituting themselves a fixed establishment of their customer (group company). Even if the factual context of the Dong Yang case is different from these situations, the CJEU’s decision provides useful arguments too.
Firstly, the CJEU unconditionally reminds that:
- the primary point of reference for the place of supply of services is the place where the taxable person has established its business (see point 26 of the decision);
- the place where the taxable person has a fixed establishment can, by way of derogation, be taken into account, but only in order to prevent situations where the good functioning of the common VAT system could be jeopardized (see point 27 of the decision);
- a fixed establishment is characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs (see point 28 of the decision).
Secondly, the CJEU leaves the possibility open for a subsidiary to constitute the fixed establishment of its parent company, but only refers in this respect to the DFDS case law and reminds that the material conditions (permanence of the fixed establishment, human and technical resources) must be assessed taking into account the economic and commercial realities.
As already mentioned, the DFDS case law refers to a subsidiary acting as a mere auxiliary organ of the parent company in the framework of an abuse of the VAT legislation (i.e. a situation where the good functioning of the VAT system could be jeopardized).
Hence, as brilliantly demonstrated by Advocate-General Kokott in her conclusions in the Dong Yang case, a toll-manufacturing agreement (and any other services that find their way into physical products) does not entail a particular risk of abuse under VAT law (see point 56 of the conclusions). The member state of establishment of the toll-manufacturer is indeed ultimately receiving VAT on the services of this toll-manufacturer (the added value created) when the products in which the services are integrated are sold in Poland (place of consumption).
The fact that the services of the toll-manufacturer are located outside of its member state of establishment is a decision of the EU legislator which needs to be followed (see point 55 of the conclusions). It has to be noted that the CJEU did not include this demonstration in its decision, because the CJEU ultimately strictly answered the questions referred by the Polish court.
Finally, it is worth noting that the point of the decision which could appear as the more negative for taxable persons, is only resulting from a legal specificity of the Polish legislation.
When the CJEU says, without any reservation, that it cannot be excluded that a subsidiary constitutes the fixed establishment of the parent company (see point 30), it is indeed only in answer to the fact that the Polish law prohibits Korean companies from performing activities in Poland through a fixed establishment (see point 29). The CJEU is merely saying that a fixed establishment for VAT purposes may exist, even if the internal legislation in principle prohibits companies of a specific country from performing activities through a fixed establishment.
A subsidiary (and a fortiori any other group company) can only constitute the fixed establishment of its parent company if it acts as a mere auxiliary organ, which greatly limits the use cases. Furthermore, the subsidiary can only be taken into account to localize the services if the localization of the services at the place where the customer established his business would jeopardize the good functioning of the common VAT system. Yet, it is evident, and was clearly demonstrated by Advocate-General Kokott, that a toll-manufacturing agreement (and any other services that find their way into physical products) is not entailing any abuse of the VAT law.
The Dong Yang decision is decisive for much pending litigation. The arguments that were brought forward by the Polish VAT authorities are very similar to the ones used by the Belgian VAT authorities. The decision of the CJEU, despite its conciseness, provides useful counter arguments to the taxable persons, being third-party service providers or group companies.
Services companies being challenged about the existence of a VAT fixed establishment in Belgium (or potentially in other EU countries) will find useful arguments in the recent Dong Yang decision.
Part 2 looks at the tax treatment of dividends, and financing costs for dividend distributions.
Laurent Donnay de Casteau is a Partner and Lionel Wellekens is Counsel at Advisius, Brussels.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.