Fixed establishments and service subsidiaries

The CJEU has again considered the circumstances in which a subsidiary of a company may constitute a fixed establishment of its parent for the purposes of receiving supplies: Berlin Chemie A (Case C-333/20). The Court has again emphasised that the mere existence of a subsidiary providing services to its parent will not be sufficient to amount to a fixed establishment and that it is necessary both for the parent company to have available to it the necessary human and technical resources as if they were its own and for that fixed establishment to receive the services for its own needs.

In particular, in this case, the Court has held that a parent company having its head office in one Member State does not have a fixed establishment in another Member State on the ground that that company has a subsidiary there which makes available to it human and technical resources under contracts whereby it merely provides marketing, regulatory, advertising and representation services, even where they are likely to have a direct impact on the volume of its sales in that second Member State.

Background

Berlin Chemie was a company established and with its head office in Germany which made supplies of pharmaceutical products in Romania. For these purposes, it set up a subsidiary in Romania and entered into an agreement with it under which the Romanian subsidiary provided marketing, regulatory, advertising and representational services and undertook to actively promote the German company's products in Romania through marketing activities, in accordance with the strategies and budgets established and developed by the German company. The Romanian company took orders for pharmaceutical products from wholesale distributors in Romania and forwarded them to the German company. It also processed invoices and forwarded them to the German company's customers. The German parent company was its only customer.

The Romanian company was remunerated for its services by a cost plus mark up on its expenses of 7.5%. It did not account for Romanian VAT on its charges, taking the view that its supplies took place in Germany. However, the Romanian tax authorities considered that its supplies were made to a permanent establishment of the German company located in Romania (made up of the facilities provided to the German company by the Romanian subsidiary) and that Romanian VAT was due on those fees.

On appeal, the Romanian courts referred the question to the CJEU concerning whether Article 44 of the VAT Directive and Article 11(1) of Implementing Regulation No 282/2011 must be interpreted as meaning that a company established in one Member State has a permanent establishment in another Member State on the ground that that company has a subsidiary there which makes available to it means human and technical under contracts whereby it provides marketing, regulatory, advertising and representational services that are likely to have a direct impact on the volume of its sales

CJEU decision

Article 11(1) of the Implementing Regulation provides that a “fixed establishment” for these purposes means “any establishment, other than the seat of the economic activity referred to in Article 10 of this Regulation, which is characterised by a sufficient degree of permanence and an appropriate structure, in terms of human and technical resources, enabling it to receive and use the services which are provided for the specific needs of that establishment.'

The decision of the Court highlights that for a fixed establishment to exist, there must be both (a) a sufficiently permanent structure of human and technical resources and (b) those resources must enable the customer to receive and use the services for that establishment”.

On the first element, the Court states that the existence of an appropriate structure in terms of human and material resources with a sufficient degree of permanence must be established in the light of economic and commercial reality. Although it is not necessary for an entity to have its own human or technical resources, in order to be able to consider that a taxable person has a structure with a sufficient degree of permanence and appropriate, in terms of human and technical resources, in another Member State, it is necessary that taxable person have the power to dispose of those human and technical resources in the same way as if they were his own. For example, on the basis of service or rental contracts making those means available to the taxable person and which cannot be terminated in the short term.

In this case, although the German company did not have its own resources, it had permanent and uninterrupted access to such resources, since the contractual arrangements for the provision of marketing, regulatory, advertising and representation services could not be terminated in the short term. On the basis of that contract, the Romanian company made available to the German company technical means (computers, operating systems, motor vehicles), but above all human resources with more than 200 employees, including, in particular, more than 150 sales representatives.

Nevertheless, the Court stressed that it would only be if it were established that, by reason of the contractual provisions, the German company had at its disposal the technical and human resources of the Romanian company as if they were its own that the German company could have a structure with a sufficient degree of permanence and appropriate, in terms of human and technical resources, in Romania. That was a matter for the Romanian courts to determine.

However, it would also be necessary, for the existence of a fixed establishment, for those human and technical resources to enable the services to be received and used for the specific needs of its activity. However, in this case, it was clear that the Romanian company's staff merely took orders from wholesale distributors of medicinal products in Romania and forwarded them to the German company, as well as sending invoices from that company to its customers in that Member State. The Romanian company was not directly involved in the sale and delivery of the German company's pharmaceutical products and did not enter into commitments to third parties on behalf of the German company.

Therefore, the CJEU indicated that the marketing, regulatory, advertising and representation services provided by the Romanian company were received by the German company and used by its human and technical resources located in Germany to conclude and execute the sales contracts with the distributors of its pharmaceutical products in Romania.

The Court also pointed out that in this case the human and technical resources which were made available to the German company by the Romanian company, and which, according to the Romanian tax authorities, make it possible to characterise the existence of a permanent establishment of the German company in Romania are also those through which the Romanian company provides services to the German company. On this point, the Court pointed out that “the same means cannot be used both to provide and to receive the same services”.

Comment

The decision is another which emphasises that it may only be in unusual circumstances where a subsidiary may be treated as a fixed establishment of its parent for VAT purposes. The mere existence of contractual arrangements, even exclusive contractual arrangements, providing resources to a parent will not be sufficient per se to result in a fixed establishment.

Equally, however, it is important to note that this is another case (like the earlier Dong Yang case) involving questions over the place of belonging of the customer, rather than the supplier. It may be that different consideration may apply where the place of supply depends on the location of supplier (rather than the customer) and where earlier case law on this issue may also be relevant, such as the DFDS case in which the CJEU held that a subsidiary might be a fixed establishment if it were a "mere auxiliary organ".