On 14 November 2019 Advocate General KOKOTT gave its opinion in case C-547/18 (Dong Yang Electronics). The case deals with the question if and when a foreign company has a fixed establishment in the EU.
Dong Yang Electronics sp. z o. o. (‘Dong Yang’), established in Poland, had a contract with LG Display Co. Ltd. (Korea) (‘LG Korea’), established in the Republic of Korea, to provide services consisting in the assembly of printed circuit boards from certain materials (sub-assemblies, components) owned by LG Korea.
The materials were provided to Dong Yang by LG Display Polska sp. z o.o. (‘LG Poland Production’) — a subsidiary of LG Korea. Dong Yang in turn provided LG Poland Production with the processed printed circuit boards after assembly. While Dong Yang coordinated the total quantity of material required with LG Korea, it received information on the daily quantity required from LG Poland Production.
The relevant relationships within the ‘LG Group’, which were not known to Dong Yang, are as follows:
LG Poland Production assembled ready-to-use TFT-LCD modules from components owned by LG Korea on the basis of contractual obligations with LG Korea. LG Poland Production provided further services to LG Korea in connection with the storage and logistics for the finished products, which were also owned by LG Korea. The finished products were sold by LG Korea to another subsidiary in Poland (‘LG Poland Sales’), which then sold them on the European market.
LG Korea, which was registered for VAT purposes in Poland and had a tax representative, assured Dong Yang that it did not have a fixed establishment in Poland, as it did not employ staff, did not own property, and did not have technical equipment there.
Dong Yang therefore issued invoices for its assembly services to LG Korea which did not include VAT. Instead, the invoices contained a reference to Article 28b(2) of the Polish VAT Law (which is Article 44 of the VAT Directive). The invoices showed that the service recipient was LG Korea and that company also paid them.
The Polish tax authorities did not agree with this VAT treatment. According to the authorities, Dong Yang’s services had not actually been supplied to the seat of LG Korea in Korea, but to the place of its fixed establishment in Poland — LG Poland Production.
The tax authorities based this opinion on the basis of the contractual relationships between LG Korea and LG Poland Production. Based on this, LG Korea had created a fixed establishment in Poland by ‘exploiting the economic potential’ of LG Poland Production through implementing a suitable business model by way of the agreements.
Dong Yang, instead of relying on the statements of LG Korea, should have examined the use of its services as required by Article 22(1) of the EU VAT Implementing Regulation. Had it done so, it would have been able to see that the actual beneficiary of the services supplied by it was LG Poland Production.
Dong Yang does not agree with this view. It argues that the requirements for the existence of a fixed establishment within the meaning of Article 44 of the VAT Directive and Article 11(1) of the Implementing Regulation had not been met.
The Wojewódzki Sąd Administracyjny we Wrocławiu (Regional Administrative Court, Wrocław, Poland) referred the following questions to the Court for a preliminary ruling:
- Can it be inferred, from the mere fact that a company established outside the European Union has a subsidiary in the territory of Poland, that a fixed establishment exists in Poland within the meaning of Article 44 of the VAT Directive and Article 11(1) of the Implementing Regulation?
- If the first question is answered in the negative, is a third party required to examine contractual relationships between a company established outside the European Union and its subsidiary in order to determine whether the former company has a fixed establishment in Poland?
It is worth noting that the present case concerns ‘only’ the correct treatment under VAT law and not the amount of (Polish) tax revenue. If the services were supplied to a fixed establishment in Poland, the Korean contractor would indisputably have been able to deduct that VAT. This is because the goods manufactured were sold from Poland on the European market, such that they are subject to tax. Either way, the VAT would result in neither a tax charge for the Korean contractor nor an increase in Polish tax revenue.
Nevertheless, the question is relevant as the contractor’s liability to pay VAT in Poland depends on whether or not a subsidiary can be regarded as a fixed establishment of a parent company. Under certain circumstances, this question could be vitally important to that contractor if it is subsequently unable to collect the VAT from its contracting partner.
The Court has previously expressed its view several times on the question of when a fixed establishment exists within the meaning of VAT law. However, it is not possible to find a clear statement on the assessment of a subsidiary as a fixed establishment of a parent company. In the DFDS decision, the Court of Justice lent towards the view that a subsidiary can also be regarded as a fixed establishment. It distanced itself from this view again in the Daimler decision, however. In the Welmory case, most recently, it was able to avoid giving an answer. The Court must now provide a clear answer to this question.
26. The subject matter of the first question is expressly only whether the mere fact that a parent company from a third country has a Polish subsidiary (in this case, LG Poland Production) results in it — the parent company from Korea — having a fixed establishment in Poland within the meaning of Article 44 of the VAT Directive.
27. However, it is clear from the order for reference that, if the question is answered in the negative, the referring court would also like to know what other criteria should be relevant to determine whether a subsidiary (LG Poland Production) constitutes a fixed establishment of the parent company (LG Korea). This is because an obligation to verify the contractual relationships referred to in the second question referred would exist only if they were relevant to the determination of the existence of a fixed establishment.
29. It is clear from the wording of the VAT Directive alone that a dependent but legally autonomous subsidiary cannot at the same time be regarded as a fixed establishment of its parent company. Article 44 of the VAT Directive refers to a single taxable person who has established his business in one place and has a fixed establishment in another. However, a parent company and a subsidiary are not one taxable person, but two.
30. Although Article 11 of the VAT Directive allows Member States, under certain circumstances, to ‘regard as a single taxable person’ several taxable persons who are closely bound to one another (a ‘VAT group’), this possibility is limited to the territory of the Member State concerned (‘persons established in the territory of that Member State’). Since LG Korea is indisputably established in South Korea, a VAT group together with its subsidiary in Poland is ruled out from the outset.
31. Nor do the other substantive criteria of Article 44 of the VAT Directive, which are set out in more detail in Article 11(1) of the Implementing Regulation, allow the conclusion that a connection under company law with another taxable person alone can constitute a fixed establishment of the parent company.
32. In this context, Article 11(1) of the Implementing Regulation mentions criteria such as a sufficient degree of permanence of the establishment and a structure enabling it to receive and use services. These are all criteria which have no connection with company law and can therefore only relate to the fixed establishment of a single taxable person who has established his business elsewhere.
33. Article 11(1) of the Implementing Regulation therefore answers only the question of whether the existing infrastructure of a taxable person in a place other than that where he has established his business is sufficient in itself to constitute a fixed establishment. Contrary to the view taken by the Republic of Poland, Article 11(1) of the Implementing Regulation does not provide any meaningful clarification in relation to the question to be ruled on here, as to whether the infrastructure of a different taxable person (that is to say, the place where he has established his business) can also constitute a fixed establishment of a taxable person who can be distinguished therefrom.
34. Therefore, in line with the view taken by the Commission, the first question can be answered with a clear ‘no’. The mere fact that a company from a third country has a subsidiary in a Member State does not mean that that subsidiary is a fixed establishment within the meaning of the second sentence of Article 44 of the VAT Directive in that Member State.
The AG proposes that the European Court of Justice answer the questions as follows:
1. In principle, a subsidiary of a company (from a third country) is not a permanent establishment of the latter within the meaning of the second sentence of Article 44 of the VAT Directive and Article 11(1) of Implementing Regulation (EU) No 282/2011.
2. A different conclusion is conceivable only if the contractual structure chosen by the customer were to infringe the prohibition of abusive practices. This assessment falls within the remit of the referring court.
3. The VAT Directive requires a taxable person to exercise a reasonable degree of care in determining the correct place of supply. However, this does not include seeking out and verifying inaccessible contractual relationships between his contracting partner and the subsidiaries thereof.
Note from the editors:
This is a very interesting and important case. The whole opinion is certainly worth reading. Since the Welmory case, some EU countries have been trying to argue that every foreign company doing business in their country, immediately has a fixed establishment. We believe that the Welmory case was mainly decided to avoid a (potential) VAT fraud set-up, and it should be seen as such. Still, the case is there, and thus this Dong Yang case is necessary to shed more light on if and when a fixed establishment for VAT exists.
The opinion of the AG gives a good guidance on this, and ‘shaves’ away some of the sharp edges of the Welmory case. However, it also still leaves it up to the factual and contractual arrangements that are in place to determine if a fixed establishment exists or not. On the other hand, the last part of the opinion gives some relieve to the supplier: he can only know what knows, and he should not have to dig into the contractual relationship of his customer in order to check what his customer is doing.