Briefing Document & Podcast: ECJ VAT C-605/12 (Welmory) – Clarification of “Fixed Establishment” Concept in VAT

VAT Fixed Establishments – Key Insights from the Welmory Case (C-605/12)

I. Executive Summary

The Welmory (C-605/12) case, decided by the Court of Justice of the European Union (CJEU) on October 16, 2014, is a landmark ruling concerning the interpretation of Article 44 of Council Directive 2006/112/EC (the VAT Directive) and the concept of “fixed establishment” for Value Added Tax (VAT) purposes. The case clarified how to determine the place of taxation for business-to-business (B2B) services, particularly when a recipient company in one Member State utilizes the infrastructure of an independent company in another Member State.

The core objective of EU VAT place of supply rules is to “avoid, first, conflicts of jurisdiction which may result in double taxation and, secondly, non-taxation” (Curia, para 42). The Welmory judgment reinforced that the primary point of reference for B2B services is the recipient’s main place of business, with a “fixed establishment” acting as an exception. Critically, for an establishment to qualify as “fixed,” it must possess 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” (Curia, para 58; Implementing Regulation, Article 11(1)). The CJEU emphasized that the economic links between companies, or the benefit to consumers in a particular country, are not material to this determination; the focus must be on the recipient’s functional capacity to receive and utilize the specific services at the alleged fixed establishment. The national court retains the crucial role of fact-finder in applying these criteria.

II. Key Themes and Most Important Ideas/Facts

1. Evolution of Place of Supply Rules for B2B Services

Pre-2010 (Sixth Directive Article 9(1) & VAT Directive Article 43): The general rule for determining the place of supply of services was primarily based on where the supplier had established their business or a fixed establishment from which the service was supplied.
Quote: “The place where a service is supplied shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied…” (Curia, Article 9(1) of the Sixth Directive).
Post-2010 (VAT Directive Article 44, as amended by Directive 2008/8/EC): The rule shifted for B2B services. The place of supply is now primarily where the recipient of the services has established their business.
Quote: “The place of supply of services to a taxable person acting as such shall be the place where that person has established his business. However, if those services are provided to a fixed establishment of the taxable person located in a place other than the place where he has established his business, the place of supply of those services shall be the place where that fixed establishment is located.” (Curia, Article 44 of the VAT Directive).
Rationale for the Shift: This change aimed to better align VAT taxation with the location of consumption in a B2B context, ensuring more rational and uniform delimitation of Member State competences.

2. The Primary Point of Reference: Recipient’s Place of Business

Under Article 44, the “place where the taxable person has established his business” is the primary and most appropriate point of reference.
Reasons: It is considered an “objective, simple and practical” criterion that “offers great legal certainty” and is “easier to verify” than a fixed establishment, simplifying processes for tax authorities and suppliers (Curia, para 55).
The fixed establishment rule is an exception to this general principle, to be considered only if the main place of business “does not lead to a rational result or creates a conflict with another Member State” (Curia, para 53).

3. Defining “Fixed Establishment” for the Recipient

Origin of Definition: The CJEU’s case-law (e.g., Planzer Luxembourg) directly inspired Article 11(1) of Council Implementing Regulation (EU) No 282/2011, which clarifies the concept for uniform application.
Core Characteristics: A “fixed establishment” must be characterized by:

A sufficient degree of permanence: Implies a stable and continuous presence (Implementing Regulation, Article 11(1)).
A suitable structure in terms of human and technical resources: This means having the necessary staff and equipment (Implementing Regulation, Article 11(1)).
Crucially, the ability “to receive and use the services supplied to it for its own needs.” (Curia, para 58; Implementing Regulation, Article 11(1)). This is a vital functional requirement.

Application in Welmory: The Cypriot company (recipient) would need to have “at the very least a structure characterised by a sufficient degree of permanence, suitable in terms of human and technical resources to enable it to receive in Poland the services supplied to it by the Polish company and to use them for its business” (Curia, para 59).

4. Irrelevance of “Economic Whole” and Distinct Supplies

Key Distinction: The CJEU explicitly ruled that the fact that the economic activities of the Polish and Cypriot companies “formed an economic whole” or that their results “are of benefit essentially to consumers in Poland is not material for determining whether the Cypriot company possesses a fixed establishment in Poland” for the purpose of receiving services from the Polish company (Curia, para 64).
Separate Transactions: The Court stressed the importance of distinguishing between the “services supplied by the Polish company to the Cypriot company” and “those supplied by the Cypriot company to consumers in Poland.” These are “distinct supplies of services which are subject to different schemes of VAT” (Curia, para 64). The assessment of a fixed establishment pertains specifically to the receipt of services from the Polish company by the Cypriot company.

5. Role of the National Court

The CJEU interprets EU law, but the national court remains the sole fact-finder.
In the Welmory case, it was the “national court [that] has exclusive jurisdiction to verify such factors in order to assess whether the Cypriot company has the necessary human and technical resources in Poland for it to be able to receive services supplied by the Polish company and to use them for the operation and maintenance of the auction sales website and the issuing and selling of ‘bids’.” (Curia, para 62).
If the Cypriot company’s core human and technical resources (e.g., servers, software, staff for concluding contracts) were outside Poland, it would not have a fixed establishment there, even if it benefited from Polish infrastructure provided by a separate entity.

III. Case Context and Application

The Welmory case involved:

Welmory sp. z o.o. (Polish company): Supplied services (internet auction site, server leasing, goods display) to a Cypriot company.
Welmory Ltd (Cypriot company): Operates an online auction platform, selling “bids” to customers, primarily in Poland. It was the recipient of services from the Polish company.
Dispute: The Polish tax authority (Dyrektor Izby Skarbowej w Gdańsku) argued that the Cypriot company had a fixed establishment in Poland because it used the Polish company’s infrastructure. The Polish company argued the services were supplied to the Cypriot company’s main place of business in Cyprus.
CJEU’s Ruling: The Court clarified that the existence of a fixed establishment depends on the recipient’s permanent and suitable human and technical resources to receive and use the specific services in question for its own needs. It left the final factual determination to the Polish national court.

Briefing Document & Podcast: ECJ VAT C-605/12 (Welmory) – Clarification of “Fixed Establishment” Concept in VAT

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