Point of attention: subsidiary could be a fixed establishment for VAT purposes

10 August 2020

The Court of Justice of the European Union (CJEU) recently issued its judgment in a case which deals with the question on whether a subsidiary of a foreign-based parent entity can qualify as a fixed establishment for the acquisition of supplies of services (for VAT purposes). The concept of fixed establishment is key to determining the place of the supply of services. The recently broaden interpretation of this concept may definitely create challenging difficulties in complying with VAT rules.

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Written by:
Anne Kin VAT specialist

Background of these developments

The approach of tax authorities in several EU Member States to challenge the business models of foreign-based companies in their territories is being intensified. With its judgment in this recent case the CJEU seems to further open the door for EU member states to treat a subsidiary of a foreign parent company as a VAT fixed establishment. More in general, the judgment could be an incentive for tax authorities to review business presences on a standalone basis or as part of a wider CIT (BEPS)-driven approach.

What is the definition of a fixed establishment for VAT purposes?

A fixed establishment is defined as any establishment, characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to provide the supply of goods and services. This is predominantly important for the supply of services, but it may also be relevant for the supply of goods in some cases.

Risks of these new developments

Mainly the entity which conducts the supplies bears the risk of an incorrect VAT-treatment. For instance, due to an incorrect qualification of the place of supply. In some cases however, also the recipient of the supply has to be vigilant, especially in intercompany situations. This is because in intercompany situations both the recipient and the supplier are often aware of the relevant contractual obligations and are familiar with the supply chain. Since VAT stated on an incorrectly issued invoice is not deductible it is strongly advised to monitor these transactions carefully.

How to determine the intervenience of a fixed establishment?

The existence of a fixed establishment of a company may not be inferred by a supplier from the mere fact that that company has a subsidiary in another European country. Certain specific criteria must be met.

  1. First of all, it must examine the nature and use of the service provided to the taxable person constituting the customer.
  2. Next, where that examination does not enable the fixed establishment of that customer of the service to be identified, it is necessary to pay particular attention to whether the contract, the order form and the VAT identification number attributed by the Member State of the customer and communicated to him by the customer identify the fixed establishment as the customer of the service and whether the fixed establishment is the entity paying for the service.
  3. Lastly, where the two abovementioned criteria do not enable the fixed establishment of the customer to be identified, the supplier may legitimately consider that the services have been supplied at the place where the customer has established his business.

The supplier (nor the recipient) have to profoundly inquire into contractual relationships between the parent company and the subsidiary. However, in intercompany situations both the recipient and the supplier are often already aware of the relevant contractual obligations without performing an assessment upfront.

Consult our specialists

It is of great relevance to determine whether your organization or your client has a fixed establishment for VAT purposes and whether or not these abovementioned implications apply to your situation. In case the Tax Authorities start raising questions it is best to be prepared beforehand. Please keep an eye on our website or contact Anne Kin, International VAT specialist, at telephone number +31135915125 or send Anne an e-mail.

Would you like more information? Our specialist will gladly assist you.

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