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Concept of VAT fixed establishment remains a concern for businesses

Would the recent Dong Yang Case offer businesses clarification on a concept that has long brought uncertainty?

The concept of VAT fixed establishments has been discussed at the European Commission level, in ECJ cases and in court cases across EU Member States - but uncertainty remained. Businesses looked to the decision of the recent Dong Yang case (C-547/18) for clarification. Would the outcome offer businesses the opportunity to avoid discussions with tax authorities?

Last month, the Court of Justice of the EU ruled on a case about the concept of a VAT fixed establishment (CJEU Dong Yang, no. C-547/18). In this case, the central question was whether the mere existence of a subsidiary in an EU Member State can lead to a VAT fixed establishment for the parent company established in another country. It also gave rise to the question: does a service provider need to investigate the contractual relationship between a parent company and its subsidiary to determine whether the subsidiary is a fixed establishment for VAT purposes?

The practical consequences resulting from the judgement are significant.

Facts of the case

Dong Yang is a Polish entrepreneur who assembles printed circuit boards for a Korean company (LG Korea). As LG Korea had indicated that it does not have a VAT fixed establishment in Poland, Dong Yang issues invoices for the assembly services without charging Polish VAT.

However, the Polish tax authorities are of the opinion that Dong Yang does owe Polish VAT. Their position is that LG Korea’s subsidiary in Poland (LG Poland) should be regarded as a VAT fixed establishment of LG Korea. The assembly services are therefore done for the Polish VAT fixed establishment of LG Korea, and not for the head office outside the EU. The inspector imposed a VAT assessment.

Judgement of the Court of Justice of the EU

In its judgement, the Court of Justice of the EU firstly indicates that the possibility cannot be excluded that an EU subsidiary of a parent company based outside the EU qualifies as a fixed establishment for VAT purposes. However, the existence of such a VAT fixed establishment cannot be derived from the mere fact that the parent company has a subsidiary. The assessment of whether there is a VAT fixed establishment actually depends on the question of whether the material conditions as laid down in the legislation and regulations have been met.

The Court of Justice of the EU has also found that a service provider such as Dong Yang is not required to investigate the contractual relationship between a parent company and its subsidiary to determine whether there is a fixed establishment for VAT purposes. Instead, Dong Yang can use the criteria as laid down in the VAT Implementing Regulation. These criteria include, amongst others, the nature and the use of the service provided, the contract between the service provider and the buyer, as well as the payment streams.

Practical importance

Marisa Hut, Manager VAT & Customs, from Baker Tilly in the Netherlands believes it follows from the judgement that the concept of fixed establishment in VAT is still very open to interpretation.

"The Court of Justice of the EU even explicitly leaves the option open that under certain conditions, a legally separate entity (subsidiary) qualifies as a VAT fixed establishment of the parent company. We know from experience that different foreign tax authorities seize on such considerations to confirm that there is a VAT fixed establishment, and therefore local VAT could be owed.

"It is also important for businesses to determine whether the use of human and technical resources in other countries will result in a foreign fixed establishment for VAT purposes. With a view to the judgement of the Court of Justice of the EU on Dong Yang, this is also important if these resources belong to a subsidiary. The presence of a fixed establishment can have a major effect on whether VAT is payable, the deduction of input VAT, administrative obligations and VAT registrations."

This article was first published on on 11 May 2020 and has been republished with the authors' permission.


Meet the expert

Marisa Hut
Manager VAT & Customs


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