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ECJ rules in another toll manufacturing case: no VAT fixed establishment

Slowly, the VAT position of toll manufacturers is taking shape. The European Court of Justice recently ruled again that there was no fixed establishment for VAT purposes in that specific situation. Our experts discuss the Adient-case and the new insights it provides for enterprises that do business with other group companies abroad.

VAT fixed establishment: no clear definition

The fixed establishment for VAT purposes (‘FE’) forms a (geographical) starting point for the levy of VAT. Its presence may lead to foreign VAT registration requirements and filing obligations.

In a nutshell, the fixed establishment for VAT purposes is a physical presence of a business in a different country than where the head office is established. In accordance with European legislation it must concern an establishment characterised by a sufficient degree of permanence and, in terms of personnel and technical resources, a suitable structure for receiving services for its own needs or supplying services.

A remarkable ECJ-ruling in 2020 lead to uncertainty in practice, as tax authorities in various EU member states started taking the position more frequently that a group entity’s resources form an FE of another entity within that group.

Adient-case: yet another ruling on toll manufacturing

At its core, the Adient-case revolves around this same topic. A Romanian toll manufacturer (‘Adient RO’) provided production services and other services for a German group entity (‘Adient DE’). Adient DE always remained the owner of the parts utilised in the production process. After processing, the goods were sold to third parties.

Shortly put, the question at hand was whether the resources of the toll manufacturer formed a fixed establishment for Adient DE in Romania. Just like in the prior Cabot Plastics-case, the ECJ rules that the toll manufacturer does not constitute a fixed establishment of its principal.

The Court’s considerations offer a number of interesting insights:

  • The existence of a fixed establishment cannot be determined from the mere fact that two companies are part of the same group.

  • Nor can the existence of a fixed establishment be inferred from the mere fact that there is a contract based upon which the services provided by one company are carried out for the exclusive benefit of the other.

  • The existence of a service agreement does not lead to the conclusion that (human and technical) resources of the service provider belong to the company receiving services, unless it is shown that that provider does not remain responsible for its own resources and does not provide its services at its own risk.

  • Preparatory or auxiliary activities are insufficient to conclude that there is a fixed establishment, even if these activities are needed for carrying out the company’s main tasks.

This new ECJ-ruling offers further support for the position that the resources of one entity can only be considered a fixed establishment of another entity in exceptional cases (e.g. cases of tax avoidance). The fact that one entity benefits from the use of the resources of another group entity, does not alter this.

Risk management: be aware of your VAT position

The qualification of a fixed establishment for VAT purposes is more than just an academic discussion. If you have an FE for VAT purposes, this will have consequences for matters such as your invoicing and reporting obligations. If you incorrectly assume the absence (or presence) of an FE, this may lead to additional assessments and fines. It is therefore crucial to correctly determine the tax position of every branch and entity. A regular reassessment may be necessary, as the fixed establishment for VAT purposes continues to evolve.

Here to help

If you have any questions about the fixed establishment for VAT purposes, or if you would like to (re-) evaluate whether you are compliant with the relevant rules and regulations, please do not hesitate to contact us. Our VAT & Customs Advisory experts would be happy to help you gain a clear view of your company’s VAT position.

The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly advisor.