No fixed establishment through parent-subsidiary relationship.
... or at least not automatically.
A company established outside the EU does not have a fixed establishment for VAT purposes in an EU member state merely because it has a subsidiary in that member state. The CJEU confirmed this, and that a supplier need not inquire into the contractual relationship between the company and its subsidiary for the purpose of determining whether the subsidiary constitutes a fixed establishment of the company, in Dong Yang Electronics (Case C‑547/18).
A fixed establishment is relevant to establishing the place where a supply takes place for VAT purposes. In Dong Yang, a Polish company supplied assembly services to a South Korean company and the contract was performed with the involvement of the South Korean company’s Polish subsidiary. The Polish supplier did not account for VAT on the basis that, for VAT purposes, the services should be regarded as supplied in South Korea and, therefore, outside the scope of VAT. The Polish tax authorities, however, disagreed. In their view, the Polish supplier should have accounted for VAT because the services were supplied in Poland given that, for VAT purposes, the South Korean company’s Polish subsidiary created a fixed establishment in Poland.
The CJEU’s judgment against the automatic creation of a fixed establishment and for limited supplier due diligence is certainly helpful for taxpayers. It is also welcome that the CJEU reiterated that tax authorities may not transfer their obligations to a supplier by requiring suppliers to conduct unreasonably detailed due diligence. In some respects, the CJEU’s judgment is, however, less helpful than it could have been – and it is certainly less helpful than the advocate general’s opinion in this case was:
The CJEU’s confirmation that a fixed establishment in an EU member state ‘may not be inferred … from the mere fact that’ a non-EU company has a subsidiary in that EU member state goes decidedly less far that the AG’s statement that ‘a subsidiary cannot be regarded as a fixed establishment of the parent’ unless the supply arrangement (i.e. the contract for the supply of assembly services in Dong Yang) constituted an abusive practice.
In Dong Yang, the Polish supplier had relied on the South Korean company’s assurance that it did not have a fixed establishment in Poland. The AG’s opinion suggested that such an assurance should normally be sufficient: ‘unless there are indications to the contrary, a contracting partner can certainly rely on a written assurance from another contracting partner stating that it does not have a fixed establishment in the country concerned’. Whilst not going quite as far, the CJEU at least confirmed that a ‘supplier is not required to inquire ... into contractual relationships between’ the parent and the subsidiary in order to get comfortable that the subsidiary does not constitute a fixed establishment of the parent.
Tanja Velling, Slaughter and May (tanja.velling@slaughterandmay.com)
Home >Articles > Dong Yang: CJEU rules on VAT fixed establishment
Dong Yang: CJEU rules on VAT fixed establishment
No fixed establishment through parent-subsidiary relationship.
... or at least not automatically.
A company established outside the EU does not have a fixed establishment for VAT purposes in an EU member state merely because it has a subsidiary in that member state. The CJEU confirmed this, and that a supplier need not inquire into the contractual relationship between the company and its subsidiary for the purpose of determining whether the subsidiary constitutes a fixed establishment of the company, in Dong Yang Electronics (Case C‑547/18).
A fixed establishment is relevant to establishing the place where a supply takes place for VAT purposes. In Dong Yang, a Polish company supplied assembly services to a South Korean company and the contract was performed with the involvement of the South Korean company’s Polish subsidiary. The Polish supplier did not account for VAT on the basis that, for VAT purposes, the services should be regarded as supplied in South Korea and, therefore, outside the scope of VAT. The Polish tax authorities, however, disagreed. In their view, the Polish supplier should have accounted for VAT because the services were supplied in Poland given that, for VAT purposes, the South Korean company’s Polish subsidiary created a fixed establishment in Poland.
The CJEU’s judgment against the automatic creation of a fixed establishment and for limited supplier due diligence is certainly helpful for taxpayers. It is also welcome that the CJEU reiterated that tax authorities may not transfer their obligations to a supplier by requiring suppliers to conduct unreasonably detailed due diligence. In some respects, the CJEU’s judgment is, however, less helpful than it could have been – and it is certainly less helpful than the advocate general’s opinion in this case was:
The CJEU’s confirmation that a fixed establishment in an EU member state ‘may not be inferred … from the mere fact that’ a non-EU company has a subsidiary in that EU member state goes decidedly less far that the AG’s statement that ‘a subsidiary cannot be regarded as a fixed establishment of the parent’ unless the supply arrangement (i.e. the contract for the supply of assembly services in Dong Yang) constituted an abusive practice.
In Dong Yang, the Polish supplier had relied on the South Korean company’s assurance that it did not have a fixed establishment in Poland. The AG’s opinion suggested that such an assurance should normally be sufficient: ‘unless there are indications to the contrary, a contracting partner can certainly rely on a written assurance from another contracting partner stating that it does not have a fixed establishment in the country concerned’. Whilst not going quite as far, the CJEU at least confirmed that a ‘supplier is not required to inquire ... into contractual relationships between’ the parent and the subsidiary in order to get comfortable that the subsidiary does not constitute a fixed establishment of the parent.
Tanja Velling, Slaughter and May (tanja.velling@slaughterandmay.com)
