VAT fixed establishments and foreign subsidiaries

The Court of Justice of the EU (CJEU) has dealt with the question of whether a parent company‘s VAT fixed establishment originates in another EU member state where its subsidiary is located and provides the parent company with marketing and other services.

Berlin Chemie AG, a German company, sells pharmaceutical products for wholesale in Romania where it is registered for VAT. At the same time, it has a subsidiary in Romania, with which it has concluded a contract for the provision of marketing, regulatory, advertising and representation services. Under the contract, the subsidiary undertook to promote the German company's products in Romania, and to ensure all necessary regulatory steps to facilitate the distribution of these products. For those services, it invoiced a monthly remuneration calculated based on its expenditure incurred in the services provided, plus 7.5%.

Under the basic rule for determining the place of supply, the place of supply of the services was Germany. The Romanian company thus invoiced the services to Germany without VAT, in the reverse-charge regime. However, the Romanian tax authorities challenged this approach, claiming that the German company had a fixed establishment for VAT purposes in Romania, therefore the place of supply was in Romania, and requested that the German company pay VAT in Romania. The tax administrator argued that the German company had continuous access to technical and human resources at the subsidiary. The case reached the CJEU, which had to deal with several issues.

The CJEU confirmed that the existence of a subsidiary in the EU does not automatically give rise to a fixed establishment for VAT purposes. The court then addressed the question whether the technical and human resources must belong exclusively to the (German) company to give rise to a fixed establishment. In that regard, the court confirmed the earlier conclusions that it was not necessary for the resources to be the taxable person’s own, but the taxable person must be able to use the resources as if they were just that. Furthermore, it is necessary that they do not use these resources only occasionally.

In the case in question, the German company used the human and technical resources of its subsidiary in Romania, which the subsidiary also used for its own economic activities. The CJEU emphasised that the same resources cannot be used to provide and, at the same time, receive the same services. In other words: it is not possible for the human and technical resources of the Romanian subsidiary to be at the same time regarded as a VAT fixed establishment of the German company in Romania. The German company thus does not have a structure in Romania that would allow it to receive services from the Romanian company there, hence, no VAT fixed establishment of the parent company originates in this case.

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