Existence of a subsidiary not necessarily constituting a VAT fixed establishment
The Court of Justice of the EU held that the mere existence of a subsidiary does not constitute a fixed establishment for VAT purposes, and that third parties are not required to examine contractual relationships between a parent and a subsidiary.
Dong Yang, a Polish company, had a contract with LG Korea, a Korean company, to whom they provided the assembly of printed circuit boards. The materials and components were supplied to Dong Yang by a subsidiary of LG Korea, LG Poland. The assembled products were delivered by Dong Yang back to LG Poland. Dong Yang invoiced the services provided to LG Korea without Polish VAT, assuming that the place of supply was the registered office of the service recipient, i.e. Korea. However, the Polish tax administrator believed that the services should be subject to Polish VAT, since LG Poland was an establishment of LG Korea and the services were provided to that establishment.
The Polish administrative court referred two prejudicial questions to the CJEU. First, it asked whether a parent company established outside the EU has a VAT fixed establishment merely because it has a subsidiary in Poland. The CJEU held that a subsidiary may in fact constitute an establishment of a non-EU parent company (for VAT purposes). However, such an establishment must have a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs. The CJEU further held that to determine the existence of a VAT establishment, it is not possible to consider solely the legal status of the entity concerned, but also to assess the economic and commercial realities. The CJEU thus held that the mere existence of a subsidiary in an EU member state does not constitute a non-EU parent company’s fixed establishment.
The second question concerned the extent to which a supplier of a service is required to examine the contractual relationships of their customer. The CJEU held that neither the VAT Directive nor Implementing Regulation No. 282/11, laying down the criteria for determining a fixed establishment, imply that a supplier of services is required to examine the contractual relationships between a non-EU parent company and its subsidiary in an EU member state. Dong Yang was thus under no duty to examine the contractual relationships between LG Poland and LG Korea, and from the mere existence of LG Poland could not have deduced that LG Korea had a fixed establishment in Poland for VAT purposes.