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Berlin Chemie judgement: subsidiary is not a fixed establishment for VAT purposes
On 7 April 2022, the Court of Justice of the EU (CJEU) ruled in the case of Berlin Chemie (no. C-333/20), which concerned the concept of the fixed establishment for VAT purposes. Shortly put, the CJEU ruled that a parent company does not have a fixed establishment in another Member State, if it has a subsidiary that provides sales support services there. In this article we will look into the CJEU’s judgement and discuss the possible consequences for your business.
The fixed establishment acts as the point of reference for the levy of VAT. Among other things, its presence is decisive for determining whether VAT is due, and where supplies are subject to VAT taxation. Since 2011, the concept of the ‘fixed establishment’ is defined in the VAT Directive (no. 282/2011). It must concern an establishment that is characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to perform or receive supplies. In practice, the interpretation of the concept often leads to differences of opinion with (foreign) tax authorities.
Dong Yang: subsidiary as a fixed establishment?
Some time ago, a remarkable judgement was published concerning the fixed establishment for VAT purposes (Dong Yang, no. C-547/18). In that particular case, the CJEU ruled that a subsidiary can constitute a fixed establishment of its parent company. Whether this is so, does however depend on the question of whether the substantive conditions are met. The existence of a fixed establishment in another State can therefore not be derived from the mere fact that a parent company has a subsidiary there.
In practice, the Dong Yang judgement caused some commotion. Contrary to what was previously assumed, the CJEU appears to be of the opinion that the concept of the fixed establishment is not necessarily limited by the legally independent nature of the legal entities involved. The Berlin Chemie case of 7 April deals with the same topic.
Berlin Chemie: the facts at hand
Berlin Chemie AG (hereinafter: BC AG) is an entity that is established in Germany. Part of its activities consist of selling pharmaceutical products in Romania. BC SRL, an (indirect) subsidiary of BC AG, has its registered office in Romania and performs marketing and support services in order to promote the sales of these pharmaceutical products. BC SRL issued invoices without VAT to BC AG, which was also its only customer, taking the view that the services are taxable in Germany under the reverse-charge mechanism. The Romanian tax inspector issued an assessment for additional VAT. According to the tax inspector, BC AG had access to sufficient human and technical resources to constitute a fixed establishment in Romania. As the services supplied were received by a fixed establishment, Romanian VAT is due.
In its judgement, the CJEU has ruled that the existence of a fixed establishment for VAT purposes must be assessed in light of the economic and commercial reality. It is not necessary that the entrepreneur itself owns the technical resources, or that the staff is bound to it by means of employment contracts. This would be a too restrictive interpretation of the fixed establishment. If an entrepreneur does not itself possess the human and technical resources in another Member State, it must have at its disposal another party’s resources as if they were its own for there to be a fixed establishment.
According to the Romanian tax inspector, BC SRL’s resources not only constitute a fixed establishment of BC AG, but are simultaneously used by BC SRL to supply sales support services to BC AG. This view is dismissed by the CJEU. The same resource cannot, after all, be used both to provide and receive the same services. It follows from EU VAT law that a parent company does not have a fixed establishment if it owns a subsidiary, in another Member State, that uses its resources exclusively for sales support services in aid of the parent company.
It follows from the Berlin Chemie judgement that the CJEU does not simply consider a subsidiary to be a fixed establishment of a parent company - even if that subsidiary is directly controlled by the parent company. The subsidiary’s resources cannot constitute a fixed establishment and also be used to provide services concerning that fixed establishment.
However, the CJEU does not explicitly come back on its earlier decision that a subsidiary can form a fixed establishment of its parent company. We therefore conclude that such situations may still occur. In practice, we see that (foreign) tax authorities often apply the concept of the fixed establishment relatively liberally in VAT situations. For example, sometimes a foreign stock location is deemed to be a fixed establishment, even if it is managed by a legally independent warehouse operator. Such interpretations of the concept often lead to differences of opinion with (foreign) tax authorities.
Your company, too, should assess whether the use of human and technical resources in other countries may lead to a fixed establishment for VAT purposes abroad. Please note that a (foreign) fixed establishment may greatly affect questions such as whether VAT is due, as well as administrative obligations and VAT registrations.
If you have any questions, or if you would like to discuss your foreign activities, please feel free to contact Marisa Hut (+31 (0) 6 52 75 98 75) or Barthold Bergman (+31 (0) 6 15 48 68 85) of our VAT & Customs Advisory team.