‘Fixed establishment’ concept clarified in EU VAT ruling

Tax law expert Bryn Reynolds of Pinsent Masons said the ruling by the Court of Justice of the EU (CJEU) provides clarification on the concept of ‘fixed establishment’ under EU VAT laws – and is likely to be “highly persuasive” in the UK too.

The issue was brought before the CJEU by a court in Romania where a dispute has arisen between SC Adient Automotive România SRL (Adient Romania), a Romanian automative equipment supplier, and the country’s tax authority. The dispute revolves around the tax authority’s VAT assessment of Adient Romania over its supply of manufacturing services to a sister company based in Germany, Adient Germany.

Adient assessed that VAT was not due on the supply in Romania but that rather the arrangements were taxable in Germany by the recipient. Romania’s tax authority disagreed. It assessed Adient Germany for VAT on the services supplied because it took the view that Adient Germany had a ‘fixed establishment’ in Romania by virtue of Adient Romania’s branches in the country. The case came before a regional court in Romania, which asked the CJEU to help it interpret EU VAT law so it could resolve the dispute before it.

Under EU VAT law, EU member states have a degree of freedom over the VAT rates they can apply to services supplied. This adds importance to understanding the jurisdiction within which VAT is to be assessed as arising.

Under EU VAT law, the default position is that “the place of supply of services” – where VAT is to be assessed as arising – is the place where the business receiving those services “has established his business”. However, in cases where the services are supplied to a different ‘fixed establishment’ of the recipient business, the place that ‘fixed establishment’ is located is “the place of supply” of those services for the purposes of assessing VAT.

The Romanian regional court framed questions around those and other provisions of the VAT legislation, to help it determine whether Adient Germany could be said to have a ‘fixed establishment’ in Romania.

The CJEU said: “[The relevant legislation] must be interpreted as meaning that a company subject to value added tax having its business in one member state, which receives services provided by a company established in another member state, cannot be regarded as having a fixed establishment in that other member state, for the purposes of determining the place of supply of those services, solely because the two companies belong to the same group or those companies are bound as between themselves by a contract for the provision of services.”

Whether a company operates a structure, as Adient Germany claims to do, that enables it to intervene in the supply of finished products provided by a company within the same group from another EU member state, is irrelevant to the point, the CJEU added.

The CJEU said, though, that if a company’s “technical and human resources” in one EU member state are “distinct” from those its sister company in that country uses to supply it with services, then it can be said to have a ‘fixed establishment’ in that country too – provided those resources perform more than “preparatory or auxiliary activities”.

It is for the Romanian regional court to apply the CJEU’s case law to the circumstances in the Adient case to determine the outcome of that dispute.

“There has been a flurry of decisions in relation to fixed establishments over recent years, leading to significant legal uncertainty for taxpayers,” said Reynolds. “This case will be of particular interest to the financial services sector following the decision in the UK of the Upper Tribunal in the preliminary issues hearing in the case of HSBC Electronic Data Processing (Guangdong) Ltd v HMRC.”

“Whilst CJEU decisions are no longer binding on the UK courts, the guidance provided in this decision is likely to be highly persuasive to UK judges seeking to interpret the meaning of the term in both a VAT grouping and place of supply context,” he said.