The EU Court Has Clarified the Concept of Fixed Establishment

In its important decision in case Cabot Plastics Belgium SA (C-232/22), the Court of Justice of the European Union has clarified the concept of a fixed establishment, or FE, for value-added tax purposes. On June 29, the CJEU held that a Belgian toll manufacturer didn’t constitute an FE for its affiliated Swiss principal.

The CJEU had previously addressed the question whether a subsidiary (or other legally independent entity) can constitute an FE of another company. For example, in its decision in Dong Yang (C-547/1), the CJEU stated that a subsidiary can create an FE for VAT purposes for a parent company established in another country. In its judgment in Berlin Chemie (C-333/20), the court clarified that a legally independent entity may create an FE for an affiliated company if it can dispose of the former entity’s resources as if they were its own.

The main difference between the Cabot Plastics case and the previous Berlin Chemie case is that in the current case the service provider belonging to the same group provided not only sales support services to its principal, but also toll manufacturing services.

In its judgment in Cabot Plastics, the CJEU largely follows its judgment in Berlin Chemie and states that the toll manufacturing and ancillary logistical and sales support services don’t create an FE for a receiving company, even if they are provided on an exclusive basis.

Facts of the Case

A Swiss company, Cabot Switzerland GmbH (Cabot CH) concluded a tolling contract with a legally independent Belgian company Cabot Plastics (Cabot BE) belonging to the same group. Final products were sold by Cabot CH from Belgium to various customers on the Belgian market, on the EU market, or for export.

Besides the toll manufacturing, Cabot BE provided a series of additional services under the exclusive agreement with Cabot CH, in particular storing its products, making recommendations and providing support regarding the manufacturing process, facilitating customs formalities, providing compliance with various standards and customs and excise duties.

The Belgian tax authority took the view that Cabot CH had an FE in Belgium for the purposes of VAT, and accordingly the services provided by Cabot BE to Cabot CH had to be regarded as taking place in Belgium and subject to VAT in Belgium.

The referring court found the issue insufficiently clear and raised the question of whether Cabot BE’s resources—which were used for providing to Cabot CH not only toll manufacturing, but also a series of ancillary services pursuant to an exclusive contract concluded between them—constituted an FE for Cabot CH in Belgium.

The CJEU’s Decision

The CJEU referred to its previous decision in Welmory (C-605/12) by stating that to be considered as having an FE in another country, a company must have a sufficiently permanent and suitable structure in that country to enable it to receive the services concerned there, and to use them for its business.

Further, the CJEU referred to its decision in Berlin Chemie, stating that:

• The fact that a company has a subsidiary in another country doesn’t in itself mean that it also has its FE there.
• It isn’t necessary to own the staff or technical means in another country; however, it is necessary to have the right to dispose of those means in the same way as if they were the company’s own.
• The contract for the provision of services, while exclusive, doesn’t in itself mean that the provider’s resources become those of its customer or that an FE is created for a receiver of the services.
• Even if an FE is created because of sales of goods, this doesn’t mean that services are received by the same FE.
• Preparatory or auxiliary activities in relation to the business of the recipient of the services concerned don’t create an FE for the receiving company.
• Services can’t be both supplied and received by the same FE.

The CJEU explained that it is necessary to distinguish the tolling services received by Cabot CH from the sale of its goods. Those services and sales constituted distinct transactions, and are subject to different VAT rules.

Therefore, to establish the place where those services are received by Cabot CH, it is necessary to identify where the human and technical resources that company uses for receiving services are situated, and not the place where the resources it uses for its sales activity are located.

The human and technical resources that were made available to Cabot CH by Cabot BE—and, according to the Belgian tax authorities, make it possible to establish the existence of an FE of Cabot CH in Belgium—are also those through which Cabot BE supplies the services to Cabot CH. Consequently, the FE is both the supplier and the recipient of the services. Yet the same means can’t be used both to provide and receive the same services.

The CJEU concluded that a business doesn’t have an FE as a result of receiving services from an affiliated company where that recipient doesn’t have a suitable structure in terms of human and technical resources capable of constituting that FE.

Practical Consequences

This issue has caused considerable controversy in several countries, including Belgium and Poland. In Romania, the tax authorities have taken the position that local toll manufacturing arrangements result in a foreign principal having a FE of the toll manufacturer. Consequently, the Romanian toll manufacturer becomes liable to account for Romanian VAT on the manufacturing services provided to its foreign principal.

After this decision, the tax authorities of these countries have less room to argue that a service provider/toll manufacturer in an EU country can create an FE for its affiliated entity that sells its goods in the country.

Businesses that operate internationally will welcome the decision, as it provides more clarity on the interpretation of the concept of FE and offers guidance in discussions with tax authorities.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Aiki Kuldkepp is senior manager, tax, with Grant Thornton Netherlands.

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