By Adrian ȚAGA, Ph.D., ADIT, tax advisor, National Tax Agency, Bucharest
On April 7, the European Court of Justice issued a judgment in case C-333/20 Berlin Chemie A. Menarini on a request for a preliminary ruling concerning the interpretation of Article 44 of Council Directive 2006/112/EC on the common system of VAT, and Article 11 of Council Implementing Regulation (EU) No 282/2011 laying down implementing measures for the above directive.
The issue the Romanian Court of Appeal essentially put forward addressed the question of whether a local subsidiary might constitute—in certain circumstances—a fixed establishment of another taxable entity, which is a member of the same group and a resident in another member state. Clarification on this issue was decisive in determining the place of the supply of services and, ultimately, establishing the VAT liability.
Background
A German company supplied products in Romania through a number of wholesale distributors. The group also has a registered a Romanian subsidiary with whom it entered into a marketing, regulatory, advertising, and representation services contract, under which the Romanian entity (besides other activities), promoted the products on the local market under the supervision of the German owner. According to the group’s own assessment, the place of service supply by the Romanian subsidiary was Germany and, therefore, the invoices had been issued without VAT.
This assessment was challenged, however, during the audit Romanian tax authorities performed, which claimed that the services had been supplied to the German company in Romania, where the former should have a fixed establishment. This view was taken by assessing that the local entity was entirely owned by the German entity and that its staff and assets were available to it, which fulfilled the condition of sufficient technical and human resources to receive such services.
Consequently, tax authorities asserted that the resources the Romanian entity used to provide the services were the same resources that the German company presumably used to receive the services. The fact that the marketing, regulatory, advertising, and representation services were provided exclusively to the German-related entity and that they were likely to have an impact on the sales volume, has also been considered.
Past case law
Even though the subject of VAT nexus through the EU concept of fixed establishment has been previously addressed, this ruling constitutes a welcome opportunity for clarification of this hot topic.
In 2020 a judgment (C-574/18) was issued ruling that the existence, in Poland, of a fixed establishment of a company established in South Korea may not be deduced merely from the fact that the company has a subsidiary there.
As a consequence, service providers should consider some criteria to determine to whom the services are provided but they are not supposed to incur an unreasonable burden by examining the contractual relationships within the customer’s group. The takeaway from this case law is that the decision on the qualification as a fixed establishment cannot depend solely on the legal status of the entity concerned but on the economic and commercial realities.
In another citing of past case-law (C-605/12) the Court provided that the existence of a fixed establishment must no longer be determined by referring to the taxable person supplying the services but by referring to the person receiving it. Thus, the concept of fixed establishment has been defined as characterized 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—and not by the decisions that such a structure is authorized to take.
Conclusion
In the present case, the ruling provided that the advertising and marketing services that the Romanian company supplied were principally intended to provide better information about the products sold in Romania by the German company. It was determined that the Romanian company was not directly involved in the sale and the supply of the products and did not enter into commitments with third parties in the name of the German company. This makes a clear distinction between the services the Romanian company supplied and the goods its German customer sold in Romania.
The Court also invalidated the possibility that the same human and technical resources that were made available to the German company (presumably triggering a fixed establishment in Romania) could also be those through which the Romanian company supplied the services. This led to the conclusion that the German company does not have a fixed establishment in Romania since it does not have a structure allowing it to receive services and to use those services for the purposes of selling and supplying products.
Finally, this judgment sheds some light on the practice of companies that are operating in more than one member state, adding to the case-law load in the area of fixed establishment and VAT. However, as we have seen in other cases, the judgments tend to consider the facts and circumstances of each particular case.
Very useful article