Fixed establishments and toll manufacturing arrangements

The CJEU has considered the scope of the concept of a fixed establishment in the context of a parent utilising (exclusively) the toll manufacturing services of a subsidiary in Cabot Plastics Belgium v Belgium (Case C-232/22). The Court has held that the mere fact that the subsidiary provides its services exclusively to its parent does not mean that the subsidiary will amount to a fixed establishment of the parent for VAT purposes.

The decision follows closely other recent CJEU decisions in this area, most notably that in Berlin Chemie A (Case C-333/20) and highlights the high bar that a tax authority must reach in order to show that a subsidiary supplying services to its parent amounts to a fixed establishment of its parent for the purposes of receiving those supplies. Indeed, the Court again stressed that the same structure cannot be used both to provide and receive the same services. The Belgian tax authorities had entirely failed to distinguish between the resources used to make the supplies of toll manufacturing to the parent and any resources which were being used for the purposes of receiving those supplies.

Background

The case concerns supplies of toll manufacturing services by Cabot Plastics Belgium (Cabot Belgium) to its parent company, Cabot Switzerland, which was established in Switzerland. Toll manufacturing involves, in essence, the provision of manufacturing and production services to materials or semi-finished products provided by the customer.

Pursuant to the toll manufacturing agreement, Cabot Belgium exclusively used its own equipment to process, for the benefit and under the direction of Cabot Switzerland, raw materials into products used in the manufacture of plastics. In accordance with that agreement, Cabot Belgium stored on its premises the raw materials purchased by Cabot Switzerland, and then processed them into products used in the manufacture of plastics. It then stored those products before they were sold by Cabot Switzerland from Belgium to various customers on the Belgian market, on the European market or for export. The collection and transportation of the goods from Cabot Belgium's facilities were carried out either by those customers, or by external hauliers used by Cabot Switzerland.

Cabot Belgium also provided a series of additional services to Cabot Switzerland, in particular, storage of products, including managing products stored in third-party warehouses, making recommendations aimed at optimising the manufacturing process, carrying out internal and external technical checks and assessments, reporting the results to Cabot Switzerland and making deliveries or providing services needed by other production units. In that respect, Cabot Belgium also provided administrative support in relation to customs and excise duties, acted as official importer on behalf of and at the request of that Cabot Switzerland and managed packaging equipment.

These services constituted almost all of Cabot Belgium's turnover.

Cabot Belgium did not charge VAT on its supplies to Cabot Switzerland on the basis that the place of supply was where Cabot Switzerland was established and thus outside the EU. The Belgian tax authorities, however, came to the conclusion that Cabot Switzerland had a fixed establishment in Belgium for VAT purposes and that the supplies made by Cabot Belgium were to that fixed establishment such that Belgian VAT should have been charged. In particular, the Belgian tax authorities took the view that Cabot Switzerland had the necessary technical resources in the form of the production plants, distribution centre and storage areas owned by Cabot Belgium but exclusively made available to Cabot Switzerland. Furthermore, it had the necessary human resources made up of the operational staff of Cabot Belgium made available to Cabot Switzerland. Put together, the Belgian tax authorities considered that Cabot Switzerland had a fixed establishment which enabled it to receive and use the products resulting from the toll manufacturing contract to carry out its own supplies of goods in Belgium from that fixed establishment. Finally, that establishment had sufficient permanence by reason of the contractual arrangements. Cabot Belgium appealed the assessment for VAT, interest and penalties which made its way up to the CJEU.

Decision of the CJEU

The Court has noted that the question must be assessed from the position of the recipient of the supplies, not the person providing those supplies. It is, therefore, necessary to assess whether a taxable person receiving services may be regarded as having, to a sufficient degree of permanence and suitability, human and technical resources in the Member State where the services are provided and, if necessary, whether those resources actually enable it to receive and use those services there.

Firstly, the Court noted that the suitable structure of a fixed establishment in terms of human and technical resources must exist more than "occasionally". Whilst it is not a requirement for the taxpayer to own the human and technical resources, it must be able to dispose of them in the same way as if they were its own, for example on the basis of employment and leasing contracts which make those available to it and cannot be terminated at short notice.

Secondly, the fact that the supplier and recipient were subsidiary and parent was not important. A fixed establishment must be based on the economic and commercial reality and not the legal status of the entity concerned.

Thirdly, as regards the exclusive contractual arrangements, the Court noted that even if a supplier has only one customer, it is assumed to use the technical and human resources at its disposal for its own needs. It is therefore only if it can be established that, by reason of the contractual provisions, a company receiving services had the resources of its service provider at its disposal as if they were its own that it could be regarded as having a suitable structure with a sufficient degree of permanence, in terms of human and technical resources, in the Member State where its service provider has established its business.

As such, whilst the human technical resources belonged to Cabot Belgium, that did not entirely preclude them amounting to a fixed establishment of Cabot Swizerland. However, the Court also agreed with the Commission's argument that, even under exclusive contractual arrangements, if the service provide remains responsible for its own resources and provides them at its own risk, then the contract for services, whilst exclusive, does not of itself mean that the provider's resources become those if its customer.

The Court also stressed that it was important to differentiate between Cabot Switzerland use of Cabot Belgium to supply it with manufactured products and Cabot Switzerland's subsequent use of those products. Therefore, in terms of establishing the place where Cabot Belgium's supplies of toll manufacturing were received by Cabot Switzerland, it was necessary to identify the place where the human and technical resources which that company uses for that purpose are situated, and not the place where the resources it uses for its sales activity are located.

Moreover, the Court stressed again that "the same means cannot be used both to provide and receive the same services". And in this case, it was not apparent that it was possible to distinguish the resources used by Cabot Belgium for its toll manufacturing services from those which, according to the Belgium tax authorities, are used to receive those supplies in Belgium.

As regards the various additional services which Cabot Belgium provided to Cabot Switzerland, the Court noted that the fact that that a service provider also provides the recipient of those services with ancillary services to facilitate the business of that recipient, such as the sale of goods resulting from the tolling, has no bearing on the question of the existence of a fixed establishment of that recipient for the purpose of receiving the supplies of toll manufacturing services.

Finally, the Court stated that the fact that the economic activities of companies which are linked contractually by an agreement on the provision of services form an economic whole and that the results of those activities are of benefit essentially to consumers in the Member State where the service provider has its place of business is not material for determining whether the recipient of those services possesses a fixed establishment in that Member State. The Court also noted that it had previously held that a fixed installation used only for preparatory or auxiliary activities in relation to the business of the recipient of the services concerned does not constitute a fixed establishment.

As a result, the Court has held that it appeared from the facts of this case that the toll manufacturing services were received and used by Cabot Switzerland in Switzerland at its place of establishment there as it did not have a suitable structure for that purpose in Belgium.

Comment

The decision is one of a number of recent cases concerning the existence of a fixed establishment in the context of group arrangements and which highlight the high bar needed to establish the existence of a fixed establishment for the purposes of receiving supplies at the site of the supplier. For example, the CJEU recently held in Berlin Chemie A (Case C-333/20) that that supplies by a Romanian subsidiary of, essentially, marketing, advertising and support services to its German parent were made and received in Germany rather than Romania. One reason was that, even if the local subsidiary amounted to an fixed establishment, since the local subsidiary did not enter into contracts with Romanian customers on behalf of its parent and offered a purely support service for the parent to carry out is business, the support services were not used by the fixed establishment in Romania but rather by the German parent in Germany.

In Dong Yang (Case C 547/18) the CJEU identified a further restriction on the concept of a fixed establishment for the purposes of Article 44 and the receipt of supplies from a third party. The CJEU accepted that a subsidiary may amount to a local FE for these purposes. However, an independent supplier cannot be required to examine in detail the contractual relationships between the parent and its subsidiary in this context to determine if it amounts to a fixed establishment. It would be contrary to the fundamental principles of the VAT system to place the onus of examining the contractual relationships between the customer and its local subsidiaries on the service provider.

Much of this recent caselaw relating to the position of subsidiaries can be seen against the backdrop of the 20th century decision in DFDS (Case C-260/95) that where a subsidiary operates as "a mere auxiliary organ" of its parent, it will be treated as a fixed establishment of that parent. However, cases such as Hastings v HMRC [2018] UKFTT 27 show that, provided that an appropriate contractual structure exists with independent management, the bar to the establishment of an FE can be significant. In this case, a company based in Gibraltar that supplied insurance to UK customers through its broker in the UK (a related entity) was held not to have a fixed establishment in the UK. And it is also noteworthy that an opinion of 19 September 2016 by the VAT Expert Group, a group which comprises academics and experts from member states and which was set up by the European Commission to assist and advise the Commission, expresses the view that "DFDS must be viewed as an exceptional case on its facts not...capable of general application". They expressed concern that there is "increasing evidence that tax authorities incorrectly conclude that an FE exists on the basis of the existence of PE, and vice versa".