CJEU on fixed establishment for VAT purposes

A Romanian supplier to the automotive industry provided manufacturing and related services to its German related party registered for VAT in Romania. The Romanian company applied the general VAT rule and invoiced these services to the recipient's head office in Germany without Romanian VAT. The Romanian tax administration contested this practice on the grounds of an alleged presence of a fixed establishment of the German company, making the Romanian company liable to pay VAT. The case was brought before the Court of Justice of the EU to decide what factors were decisive for the formation of a ‘passive’ fixed establishment (i.e., a fixed establishment capable of receiving services for VAT purposes).

First, the CJEU stated that the taxation of services at the place of a fixed establishment is an exception to the general rule for determining the place of supply. This exception must be interpreted restrictively and can be applied only if the fixed establishment meets the condition of being equipped with human and technical resources capable of receiving the services for its own needs.

The fact that the two companies belong to the same group or are linked by a contract for the provision of manufacturing services cannot in itself establish a passive fixed establishment for VAT purposes. However, the CJEU stressed that it must be verified that the employees of the service provider are not in fact subordinated to the service recipient in terms of the condiitons of their employment and remuneration.

According to the CJEU, even the structure enabling the delivery of goods is not relevant for the existence of a passive fixed establishment. To determine the place of supply of services, it is necessary to consider the structure separately, i.e., solely in terms of its ability to receive and use those services.

Finally, the CJEU held that the existence of a fixed establishment presupposes the use of human and technical resources that are distinct from those used by the service provider. Those resources must be available to the recipient of the services to be able to use them in accordance with their own needs.
 
Thus, subject to the verification of the above facts by the referring court, no fixed establishment of the German company originated in Romania for VAT purposes in the present case. When considering the formation of a fixed establishment, it is always necessary to assess the specific situation, which may vary depending on the contractual relationship and the companies' involvement in the supply chain.

At the same time, we recommend reviewing the related impact on income tax and transfer pricing.