Reference to comments, opinions, articles and newsletters on this ECJ case have been added at the bottom of this message
Article 44 of Council Directive 2006/112 / EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2008/8 / EC of 12 February 2008, and Article 11, paragraph 1, and Article 22, paragraph 1, of the implementing Regulation (EU) No o 282/2011 of the Council of 15 March 2011 laying down implementing measures for Directive 2006 / 112, must be interpreted as meaning that the existence, in the territory of a Member State, of a permanent establishment of a company established in a third State cannot be inferred by a service provider solely because this company has a subsidiary there and that this service provider is not required to inquire, for the purposes of such an assessment, of the contractual relations between the two entities.
On 7 May 2020 the European Court of Justice gave its (highly anticipated) judgment 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.
For the opinion in this case we refer you to our earlier post HERE.
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 as a non-resident business and who had appointed 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.
This is the main point of this case: Can the Polish subsidiary of LG create a fixed establishment for LG in Poland? Or, in other words, when does a subsidiary create a fixed establishment in an EU country?
The Polish tax authorities argue that the contractual relationships between LG Korea and LG Poland Production provide LG Korea with sufficient ‘economic potential’. Furthermore, they argue that Dong Yang, as the supplier of the services, should have examined the use of its services more carefully. According to the tax authorities, Dong Yang should have concluded that the actual beneficiary of the services 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?
The Court has already held that, if the most useful point of attachment for determining the place of supply of services, from the tax point of view, is that where the taxable person has established the seat of his activity economic. The consideration of a permanent establishment of the taxable person constitutes a derogation from this general rule, provided that certain conditions are met (judgment of October 16, 2014, Welmory, C ‑ 605/12, EU: C: 2014: 2298, points 53 and 56).
As regards the question whether there is a ‘permanent establishment’ within the meaning of the second sentence of Article 44, it should be noted that this question must be examined in the light of the taxable person to whom the services are provided. In this regard, “permanent establishment” means any establishment, other than the seat of economic activity, which is characterized by a sufficient degree of permanence and an appropriate structure, in terms of human and technical resources, enabling it to receive and use the services which are provided for the specific needs of this establishment.
It cannot be excluded that the subsidiary held for the purpose of carrying out such an activity by the parent company established in South Korea may constitute a permanent establishment of that parent company.
It should be recalled that taking account of economic and commercial reality constitutes a fundamental criterion for the application of the common VAT system . Therefore, the qualification of an establishment as a permanent establishment cannot depend on the sole legal status of the entity concerned.
In this regard, if it is possible that a subsidiary constitutes the permanent establishment of its parent company (see, to that effect, judgment of 20 February 1997, DFDS, C ‑ 260/95, EU: C: 1997: 77, points 25 and 26), such a classification depends on the material conditions laid down in Implementing Regulation No 282/2011, in particular in Article 11 thereof, which must be assessed in the light of economic reality and commercial.
It follows from the foregoing considerations that the existence, on the territory of a Member State, of a permanent establishment of a company established in a third State cannot be inferred by a service provider solely from the fact that that company has a subsidiary there.
As regards the question whether the provider of the services concerned is required to examine the contractual relations between that company and its subsidiary in order to determine whether the former has such a permanent establishment in that Member State, it is necessary to note that the referring court refers, in the order for reference, to Article 22 of Implementing Regulation No 282/2011. Article 22 provides for a series of criteria, which this service provider must take into account in order to determine the permanent establishment of the customer. It is, first of all, an examination of the nature and use of the service provided to the taxable person. Then, if this examination does not identify the permanent establishment of this service taker, it should be examined, in particular, whether the contract, the order form and the VAT identification number assigned by the State member of the customer and communicated to him by the customer identify the permanent establishment as a service taker and whether the permanent establishment is the entity which pays for the service. Finally, when the two above-mentioned criteria do not identify the permanent establishment of the lessee, the provider legitimately considers that the services are provided at the place where the lessee has established the seat of his economic activity.
Consequently, it must be observed that, as the Polish and United Kingdom Governments and the European Commission have argued, it does not appear from Article 22 that the provider of the services concerned is required to examine contractual relations between a company established in a third State and its subsidiary established in a Member State to determine whether the former has such a permanent establishment in that Member State. Indeed, in particular, the second subparagraph of paragraph 1 of that article refers to the contract for the supply of services between the provider and the taxable person and not to the contractual relations between that taxable person and an entity which may, where applicable, be identified as its permanent establishment.
Furthermore, as the Advocate General noted in points 73 and 74 of her Opinion, the service provider cannot be forced to claim that the service provider inquire about the contractual relations between a company mother and its subsidiary, while these elements are not, in principle, accessible to it, obligations incumbent on the tax authorities (see, to this effect, judgment of 3 October 2019, Altic, C ‑ 329/18, EU: C: 2019: 831, point 31 and cited case law).
In the light of the foregoing considerations, the questions raised must be answered that Article 44 of Directive 2006/112 and Article 11 (1) and Article 22 (1) of the implementing regulation No 282/2011 must be interpreted as meaning that the existence, within the territory of a Member State, of a permanent establishment of a company established in a third State cannot be inferred by a service provider solely the fact that this company has a subsidiary there and that this service provider is not required to inquire, for the purposes of such an assessment, of the contractual relations between the two entities.
The ECJ rules as follows:
The existence, in the territory of a Member State, of a permanent establishment of a company established in a third State cannot be inferred by a service provider solely because this company has a subsidiary there and that this service provider is not required to inquire, for the purposes of such an assessment, of the contractual relations between the two entities.
Source Curia (English version)
Newsletters on the analysis of the ECJ decision on May 7, 2020 of the Dong Yang case (C-547/18)
- Can a subsidiary constitute a fixed establishment for VAT purposes? New ECJ judgment by Francisco Javier Sánchez Gallardo
- Grant Thornton
- Alexandra Bal
- PWC Poland
- Baker Tilly
- PWC NL
- Deloitte NL
- Deloitte Belgium
- Prawo.pl: Tomasz Michalik: The judgment of the CJEU regarding subsidiaries is a missed opportunity (Unofficial translation in English)
- EU VAT Law
- Mohamed El Kastite (EY)
- Casper Evers
- BDO NL
- BTW Instituut (in Dutch)
- KPMG Germany
- Tanja Velling, Slaughter and May on Taxjournal.com
- Belgium—Fixed Establishment for Value-Added Tax Purposes (Part 1) on bloombergtax.com
- Public information on the VAT permanent establishment (non) existence in the Czech Republic by Ondrej Stedry
- Kluwer International
- tradetaxport.com: Toll Manufacturing contracts and VAT
- TaxLive (Dutch)
- Giorgio Beretta’s commentary in H&I