On 23 August 2018, the ECJ received preliminary questions in case C-547/18 (Dong Yang Electronics SpZoo) regarding whether or not a local group company could be regarded a fixed establishment for VAT of a foreign company.
[Red. This case is particularly interesting as the Polish tax authorities are using the arguments in this case also very often in practice. We believe that the underlying question is if the Polish tax authorities are interpreting the Welmory-case correctly or too broadly.]
- Dong Yang Electronics (Poland) provided services to LG Display Co. Ltd. (Korea). LG Display had assured Dong Display Electronics that it did not have a permanent establishment in Poland.
- On the basis of that statement, Dang Yang Electronics issued invoices to LG Display, charging no VAT, assuming that no VAT was due on the services in Poland. [On the basis of article 44 of the VAT Directive, the place of supply of services is the place where the recipient of the services is established.]
- However, the tax Polish authorities designated the seat of subsidiary LG Display Polska as a permanent establishment of LG Display Co. Ltd., arguing that this local group company is accessible to LG Display as if it were its own establishment.
- Furthermore, the Polish tax authorities argue that Dong Yang should not have relied solely on the statement provided by LG Display and should check the use of the services it performed, as required by Article 22 of the Regulation.
- Ultimately, the tax authorities ruled that Dong Yang Electronics provided services in Poland and that they had to charge VAT at the standard VAT rate on these services.
- Dong Yang Electronics argued, among other things, that the decision of the tax authorities should be annulled on the ground of infringement of, inter alia, the freedom of establishment and that LG Display Polska was wrongly regarded a permanent establishment of LG Display.
The case concerns the interpretation of Article 44 of the VAT Directive. According to the Polish Court, existing case-law of the ECJ on the interpretation of the term ‘permanent establishment’ does not offer a clear answer to this.
Based on ECJ case-law, one of the characteristics of a fixed establishment is that an appropriate structure of human and technical resources must be available. A fixed establishment is also characterized by a sufficient degree of durability.
However, the referring court has doubts as to whether the VAT-law definition of a fixed establishment can not be regarded at the same time as an attempt to circumvent the prohibition on the direct exercise of an economic activity by an undertaking whose seat is outside the EU.
In addition, the question arises whether the service provider is actually capable of verifying whether such a permanent establishment exists, given that the service provider is a legally independent undertaking that is contractually bound to LG Display in Korea only. The findings of the tax authorities regarding the location of the permanent establishment were based, inter alia, on data which were not available to Dong Yang Electronics at the time of the services provided.
1. Can the mere fact that a company with its registered office outside the European Union has a subsidiary having its registered office in Poland be sufficient for determining that there is a fixed establishment in Poland within the meaning of Article 44 of the VAT Directive and Article 11 (1) of the Implementing Regulation?
2. If the first question is answered in the negative, is a third party obliged to examine the contractual relationships between the company having its registered office outside the European Union and its subsidiary in order to determine whether the former company has a permanent establishment in Poland?
Source: MinBuZa (Dutch)
Check also the Welmory-case.