CJEU rules subsidiary does not create VAT fixed establishment for its parent
Our pick of this week's cases
InDong Yang Electronics Sp. z o.o. (Case C-547/18) (7 May 2020), the CJEU ruled that the mere fact that a non-EU parent company has an EU subsidiary does not create an EU fixed establishment for the parent.
Dong Yang Electronics Sp. z o.o (‘Dong Yang’) was a business established in Poland. In 2010 it concluded a contract with a Korean company (‘LG Korea’) to provide services consisting in the assembly of printed circuit boards. LG Korea had no human or technical resources in Poland and had assured Dong Yang of this fact. However, LG Korea did have a legally separate Polish subsidiary (‘LG Production Poland’). It was this subsidiary which provided the materials to Dong Yang and to which, following assembly, Dong Yang provided the printed circuit boards.
Given the contractual relationship and the assurances from the Korean parent company, Dong Yang took the view that its services were supplied to a business established in Korea. Applying the place of supply rules for B2B supplies of services, no VAT was charged because the transaction was outside the scope of Polish VAT.
The Polish authorities challenged Dong Yang’s treatment, claiming Polish VAT should have been accounted for. This was on the basis that LG Production Poland created a fixed establishment for its Korean parent in Poland and it was this Polish fixed establishment which was the actual beneficiary of the services. On this alternative conception of the facts, the place of supply rules would dictate that there was a domestic Polish supply, on which Polish VAT was due.
The CJEU acknowledged that it is possible for a subsidiary to create a fixed establishment for its parent company (citing, in this regard, DFDS (Case C-260-95)). However, it was not possible to infer from the mere existence of a subsidiary that the parent has a fixed establishment. Moreover, the existence of a subsidiary does not place a requirement on the supplier (in this case Dong Yang) to examine contractual relationships between the parent and subsidiary to work out if a fixed establishment has been created. What a supplier must do, is follow the criteria in Implementing Regulation No 282/2011, article 22, namely:
First of all, it must examine the nature and use of the service provided to the taxable person constituting the customer.
Next, where that examination does not enable the fixed establishment of that customer of the service to be identified, it is necessary to pay particular attention to 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.
Lastly, where the two abovementioned criteria do not enable the fixed establishment of the customer to be identified, the supplier may legitimately consider that the services have been supplied at the place where the customer has established his business.
Why it matters: The judgment does not go as far as the advocate general’s opinion which suggested that a subsidiary could only create a fixed establishment for its parent in very exceptional circumstances, i.e. where there is abuse of law. However, it does give some welcome clarity in confirming that a supplier isn’t required to carry out a detailed examination of the contractual relationships in its customer’s corporate group to work out if it has a fixed establishment in a given member state.
CJEU rules subsidiary does not create VAT fixed establishment for its parent
Our pick of this week's cases
InDong Yang Electronics Sp. z o.o. (Case C-547/18) (7 May 2020), the CJEU ruled that the mere fact that a non-EU parent company has an EU subsidiary does not create an EU fixed establishment for the parent.
Dong Yang Electronics Sp. z o.o (‘Dong Yang’) was a business established in Poland. In 2010 it concluded a contract with a Korean company (‘LG Korea’) to provide services consisting in the assembly of printed circuit boards. LG Korea had no human or technical resources in Poland and had assured Dong Yang of this fact. However, LG Korea did have a legally separate Polish subsidiary (‘LG Production Poland’). It was this subsidiary which provided the materials to Dong Yang and to which, following assembly, Dong Yang provided the printed circuit boards.
Given the contractual relationship and the assurances from the Korean parent company, Dong Yang took the view that its services were supplied to a business established in Korea. Applying the place of supply rules for B2B supplies of services, no VAT was charged because the transaction was outside the scope of Polish VAT.
The Polish authorities challenged Dong Yang’s treatment, claiming Polish VAT should have been accounted for. This was on the basis that LG Production Poland created a fixed establishment for its Korean parent in Poland and it was this Polish fixed establishment which was the actual beneficiary of the services. On this alternative conception of the facts, the place of supply rules would dictate that there was a domestic Polish supply, on which Polish VAT was due.
The CJEU acknowledged that it is possible for a subsidiary to create a fixed establishment for its parent company (citing, in this regard, DFDS (Case C-260-95)). However, it was not possible to infer from the mere existence of a subsidiary that the parent has a fixed establishment. Moreover, the existence of a subsidiary does not place a requirement on the supplier (in this case Dong Yang) to examine contractual relationships between the parent and subsidiary to work out if a fixed establishment has been created. What a supplier must do, is follow the criteria in Implementing Regulation No 282/2011, article 22, namely:
First of all, it must examine the nature and use of the service provided to the taxable person constituting the customer.
Next, where that examination does not enable the fixed establishment of that customer of the service to be identified, it is necessary to pay particular attention to 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.
Lastly, where the two abovementioned criteria do not enable the fixed establishment of the customer to be identified, the supplier may legitimately consider that the services have been supplied at the place where the customer has established his business.
Why it matters: The judgment does not go as far as the advocate general’s opinion which suggested that a subsidiary could only create a fixed establishment for its parent in very exceptional circumstances, i.e. where there is abuse of law. However, it does give some welcome clarity in confirming that a supplier isn’t required to carry out a detailed examination of the contractual relationships in its customer’s corporate group to work out if it has a fixed establishment in a given member state.
