ECJ C-210/04 (FCE Bank) – Judgment – A fixed establishment is not a legal entity distinct from the business itself

On March 23, 2006, the ECJ provided his decision in the case C-210/04 related to Fixed establishment – Non-resident company – Legal relationship – Cost-sharing agreement – OECD Convention on double taxation – Meaning of ‘taxable person’ – Supply of services effected for consideration – Administrative practice

Summary

Non-Taxable Intra-Company Services: The Court ruled that a fixed establishment of a company, not legally distinct from its parent company and located in another Member State, is not considered a separate taxable person for VAT purposes, even when services are supplied and costs are imputed to it.
Independence and Economic Risk: The Court emphasized that the branch does not bear the economic risks associated with its activities, as these are borne by the parent company, thus confirming the branch’s dependency and single taxable entity status.
Relevance of Legal Personality: The judgment highlighted that the absence of legal personality for the branch means there is no independent economic activity, negating the existence of a taxable supply of services for VAT purposes.
Administrative Practices and EU Law: The ruling found that national administrative practices subjecting such intra-company transactions to VAT contradict the Sixth Directive, but it was unnecessary to address potential breaches of the freedom of establishment.
OECD Convention Irrelevance: The Court noted that the OECD Convention on direct taxation does not apply to VAT, which is considered an indirect tax, and thus does not influence the interpretation of VAT obligations.

Article in the EU VAT Directive

Articles 2(1) and 9(1) of the Sixth Directive

Equivalent articles in 2006/112/EU: Article 2(1)(a) and (c) and Article 43

Article 2
1. The following transactions shall be subject to VAT:
(a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;
(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such;

Facts

This case deals with the question whether, and if so, under which conditions services supplied within one and the same legal entity must be treated as taxable supplies for consideration subject to VAT under the Sixth VAT Directive.
FCE bank performs VAT exempt financial services. It charges its branches for its services regarding management, advice, training of personnel, data processing development and supply of software, dividing the costs between the branches. FCE IT, the Italian branch of FCE Bank, has applied the reverse charge with regard to the charge made by FCE Bank. After it paid in the VAT it subsequently claimed back the VAT arguing that it lacks separate legal personality.

Question

Reference has been made to the Court of Justice of the European Communities by order of 18 February 2004 of the Corte Suprema di Cassazione, Sezione Quinta Civile , which was received at the Court Registry on 12 May 2004, for a preliminary ruling in the case of Ministero dell’Economia e delle Finanze and Agenzia delle Entrate against FCE Bank plc on the following questions:

1. Must Articles 2(1) and 9(1) of the Sixth Directive be interpreted as meaning that the branch of a company established in another State (belonging to the European Union or otherwise), which has the characteristics of a production unit, may be regarded as an independent person and thus that a legal relationship between the entities can be said to exist with consequent liability for VAT in relation to supplies of services effected by the parent company? Can the ‘arm’s length’ standard laid down in Article 7(2) and (3) of the OECD model convention on double taxation and the Convention of 21 October 1988 between Italy and the United Kingdom of Great Britain and Northern Ireland be used to define that relationship? Can a legal relationship be said to exist where there is a cost-sharing agreement concerning the supply of services to the subordinate entity? If so, what conditions must be satisfied for such relationship to be considered to exist? Must the notion of legal relationship be dealt with under national law or Community law?

2. Can the passing on of the costs of such services to the branch concerned be regarded as consideration for the services supplied for the purposes of Article 2 of the Sixth Directive, regardless of the proportion of the costs passed on and the resulting profit to the company, and if so to what extent?

3. If the supply of services between the parent company and the branch are regarded in principle as being exempt from VAT because the recipient is not independent and consequently a legal relationship between the two entities cannot be said to exist, is a national administrative practice which considers that the supply is taxable in such a case contrary to the right of establishment laid down in Article 43 of the EC Treaty where the parent company is established in another Member State of the European Union?

AG Opinion

On a proper construction of Article 2(1) and Article 9(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, subject to the exceptions provided for by that directive, supplies of services by a non-resident parent enterprise to a secondary establishment in a Member State, which is not registered in that State as a separate legal entity and which constitutes a fixed establishment in that State within the meaning of the said Article 9(1), are not capable of constituting transactions chargeable to VAT, even if the cost of those services was allocated to the establishment in question.

Decision

Articles 2(1) and 9(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, must be interpreted as meaning that a fixed establishment, which is not a legal entity distinct from the company of which it forms part, established in another Member State and to which the company supplies services, should not be treated as a taxable person by reason of the costs imputed to it in respect of those supplies.

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