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European Union

Briefing Document & Podcast: ECJ C-547/18 (Dong Yang) – “Fixed Establishment” Concept for VAT in Cross-Border Transactions

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Case Reference: ECLI:EU:C:2020:350; Dong Yang Electronics sp. z o.o. v Dyrektor Izby Administracji Skarbowej we Wrocławiu (Case C‑547/18)

Date of Judgment: 7 May 2020

1. Executive Summary

The European Court of Justice (ECJ) judgment in Dong Yang provides critical clarification on the concept of a “fixed establishment” for Value Added Tax (VAT) purposes, particularly in cross-border transactions involving non-EU companies and their EU subsidiaries. The Court ruled that the mere existence of a subsidiary of a non-EU company in a Member State does not automatically constitute a fixed establishment for the parent company. Furthermore, it affirmed that a supplier of services is not required to investigate complex contractual relationships between a non-EU parent company and its EU subsidiary to determine the place of supply for VAT. This judgment underscores the principle of “economic and commercial realities” in VAT application and clearly delineates the due diligence obligations of service suppliers versus the investigative responsibilities of tax authorities.

2. Key Concepts and Legal Framework

The case revolved around the interpretation of EU VAT law, specifically:

  • VAT Directive 2006/112/EC (Article 44): This directive sets the general rule for the “place of supply of services” to a taxable person. The default is the place where the taxable person has established their business. However, a crucial exception applies: if services are provided to a “fixed establishment” located elsewhere, the place of supply is where that fixed establishment is located. This aims to prevent double taxation or non-taxation.
  • Implementing Regulation (EU) No 282/2011:Article 11(1): Defines a “fixed establishment” as “any establishment, other than the place of establishment of a business… characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs.” Importantly, it states, “The fact of having a VAT identification number shall not in itself be sufficient to consider that a taxable person has a fixed establishment.”
  • Article 22(1): Outlines the steps a supplier should take to identify the customer’s fixed establishment, including examining the “nature and use of the service provided,” and if necessary, “whether the contract, the order form and the VAT identification number attributed by the Member State of the customer and communicated to him by the customer identify the fixed establishment as the customer of the service and whether the fixed establishment is the entity paying for the service.”
  • “Economic and Commercial Realities”: This is a fundamental principle in EU VAT law, meaning that the application of tax rules should reflect the actual economic substance of transactions, not just their legal form.

3. Case Background: Dong Yang vs. Polish Tax Authority

Parties:

  • Dong Yang Electronics sp. z o.o. (Dong Yang): A Polish company, the supplier of PCB assembly services.
  • LG Display Co. Ltd. (Korea) (LG Korea): A Korean company, the customer of the services.
  • LG Display Polska sp. z o.o. (LG Poland): A Polish subsidiary of LG Korea, which received materials and components for the assembly process and used the final PCBs.
  • Dyrektor Izby Administracji Skarbowej we Wrocławiu: The Polish tax authority.

The Dispute: Dong Yang supplied PCB assembly services to LG Korea. Dong Yang treated these services as not subject to VAT in Poland, on the premise that LG Korea, being established in South Korea, did not have a fixed establishment in Poland. However, the Polish tax authority argued that LG Poland, LG Korea’s subsidiary, effectively constituted a “fixed establishment” of LG Korea, making the services subject to Polish VAT. They asserted that “by the contractual relationships which it had established, LG Korea used LG Poland as its own establishment.”

Questions Referred to the ECJ: The Polish court sought clarification on two key questions:

  1. “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 Directive 2006/112 … and Article 11(1) of Implementing Regulation No 282/2011 …?”
  2. “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?”

4. ECJ’s Reasoning and Judgment

The Court addressed both questions together, emphasizing the “economic and commercial realities” principle.

  • No Automatic Inference from Subsidiary: The ECJ explicitly ruled that “the existence, in the territory of a Member State, of a fixed establishment of a company established in a non-Member State may not be inferred by a supplier of services from the mere fact that that company has a subsidiary there.” The Court clarified that while “it is possible that a subsidiary constitutes the fixed establishment of its parent company… such treatment depends on the substantive conditions set out in Implementing Regulation No 282/2011, in particular in Article 11 thereof, which must be assessed in the light of economic and commercial realities.” This means a factual assessment of human and technical resources and permanence is required, not just the legal status of a separate subsidiary.
  • Supplier Not Required to Examine Intra-Group Contracts: Regarding the supplier’s due diligence, the Court stated that Article 22 of Implementing Regulation No 282/2011 “does not show that the supplier of the services concerned is required to examine contractual relationships between a company established in a non-Member State and its subsidiary established in a Member State.” The Court reasoned that “obligations which are the responsibility of the tax authorities may not be imposed on the service supplier, by asking it to inquire into contractual relationships between the parent company and the subsidiary even though that information is in principle inaccessible to it.” Article 22’s scope is limited to the contract for the supply of services between the supplier and customer, not internal arrangements between the customer and its potential fixed establishment.

Final Ruling: The Court (Fifth Chamber) ruled: “Article 44 of Council Directive 2006/112/EC… and Article 11(1) and Article 22(1) of Council Implementing Regulation (EU) No 282/2011… must be interpreted as meaning that the existence, in the territory of a Member State, of a fixed establishment of a company established in a non-Member State may not be inferred by a supplier of services from the mere fact that that company has a subsidiary there, and that supplier is not required to inquire, for the purposes of such an assessment, into contractual relationships between the two entities.”

5. Implications

  • Clarity for Service Suppliers: This judgment provides essential clarity for service suppliers, particularly those dealing with non-EU entities that have a presence (like a subsidiary) in an EU Member State. Suppliers are not burdened with the onerous task of investigating complex intra-group contractual arrangements to determine the correct place of supply for VAT. They can rely on the more practical criteria outlined in Article 22, focusing on the nature of the service, the direct contract with the customer, and the customer’s VAT identification details.
  • Burden on Tax Authorities: The responsibility for proving that a subsidiary constitutes a fixed establishment of its parent company for VAT purposes, especially based on intricate intra-group arrangements, primarily rests with the national tax authorities, not the service supplier.
  • Emphasis on Substance over Form: The ruling reinforces the principle that “fixed establishment” is a factual assessment based on “sufficient permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs,” rather than merely the legal structure of a subsidiary.
  • Promotes Proper Functioning of VAT System: By clarifying the responsibilities and criteria, the judgment contributes to avoiding “conflicts of jurisdiction which may result in double taxation and… non-taxation” and thus ensures the “proper functioning of the common system of VAT.”

See also

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