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“Fixed establishment” for VAT purposes: welcome clarifications from the CJEU

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Belgium

Less than a year after its decision in the Titanium case, the Court of Justice of the European Union ("CJEU") rendered its long-awaited decision in the Berlin Chemie case on the notion of "fixed establishment" for VAT purposes.

This decision provides very useful clarifications and arguments for companies as to the interpretation of the aforementioned notion of “fixed establishment”.

Facts of the Berlin Chemie case  

Berlin Chemie AG ("BCG"), a German company, sells pharmaceutical products in, amongst others, Romania. BCG has held (for decades) for this purpose a stock in Romania.

A Romanian (sub-)subsidiary of the group ("BCR"), created in 2011, supplies marketing, promotional and regulatory services exclusively for the benefits of BCG. BCR furthermore takes orders for pharmaceutical products from wholesale distributors in Romania and forwards them to BCG. It also deals with the invoices which it sends to BCG's customers.

BCR invoiced its services without application of VAT as these services were deemed to take place in Germany according to the general place of supply rule of services. The Romanian Tax Authorities however considered that BCG should be deemed to have a fixed establishment in Romania, through the human and technical resources of its Romanian (sub-)subsidiary, and claimed the payment of Romanian VAT on BCR's services.

Decision

A VAT fixed establishment requires in the first place a sufficient degree of permanence and a suitable structure in terms of technical and human resources (article 11 of Implementing Regulation No 282/2011).

The Implementing Regulation does not provide any details as to whether these human and technical resources must belong to the foreign company. According to the CJEU, a restrictive interpretation of this condition (i.e. the staff is contractually bound with the foreign company and the material resources must be its ownership), would allow to transfer the place of supply of services by merely having recourse to various service providers.

Therefore, it must be assessed whether BCG had the technical and human resources of BCR at its disposal as if they were its own.

Shall this be the case, article 11 of the Implementing Regulation further requires that these resources enable BCG to receive the services supplied and to use them for its own business needs.

In the Global Chemie case, the CJEU notes that the human and technical resources made available to BCG by BCR are also those through which the Romanian company supplies the services to the German company.

In those circumstances and taken into account that the same resources cannot be used both to provide and receive the same services, the CJEU concludes that BCG should in principle not be deemed to have a fixed establishment in Romania. The final word is however for the referring national judge, based on the factual circumstances.

Learnings from the case and further precisions

The CJEU’s statement that the same technical and human resources cannot be used both to provide and receive the same services is of upmost importance. Indeed, in most of current litigations concerning the notion of “fixed establishment”, the position adopted by the national tax authorities to confirm the existence of such taxable presence is generally based on this circular reasoning.

Furthermore, CJEU’s delimitation of the circumstances under which a company is deemed to have human and technical resources is also more than welcome. According to the Court, a company must at least have these resources at its disposal, as if they were its own.

While this wording could lead to various interpretation, we note that the Advocate General Kokott, in her Conclusion in the Welmory case, already elaborated on this concept. Indeed, the Advocate General recognized that it is not necessary for a foreign company to dispose of its own human and technical resources, provided it has a comparable control on the third-party resources as it has on its own resources.

In a working paper from the VAT Expert Group, it had been suggested that such comparable control would be present where employees of one entity are placed under the control and direction of another entity which exercises a sufficient level of influence over the duties and functions of those employees. Based on this interpretation, a mere marketing or logistical services agreement should in principle not grant the recipient of these services sufficient human (and technical) resources to lead to the recognition of a taxable “fixed establishment” in the Member State of its supplier.

In case of questions, please do not hesitate to contact your regular contact within the Fieldfisher Belgium tax team.

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Tax and Structuring