Subsidiaries as fixed establishments (again!)

The CJEU has reiterated that the mere existence of arrangements between related companies, even if they amount to exclusive contractual arrangements, will not be sufficient, in the context of toll manufacturing, for the provider of those services to give rise to a fixed establishment of the recipient for the purposes of receiving them: SC Adient Ltd v Agenţia Naţională de Administrare Fiscală (Case C-533/22).

The decision stresses the importance of considering the question whether there is a fixed establishment in the specific context and, in particular, whether it is a fixed establishment for the purposes of receiving as opposed to making supplies. It is important not to assume that even if a related entity might be a fixed establishment for the purposes of making supplies, it is also a fixed establishment for the purposes of receiving supplies. Moreover, the Court again pointed out the fallacy of the argument that the same entity can both provide services and also be a fixed establishment of the recipient for the purposes of receiving those resources. Even if that were the case, the arrangement would amount to an internal non-supply for VAT purposes.

Background

This is another Romanian referral to the CJEU dealing with so-called toll manufacturing arrangements very (very) similar to those considered in the earlier cases of Berlin Chemie A (Case C-333/20) and Cabot Plastics Belgium v Belgium (Case C-232/22). In this case, a company, Adient DE, with its place of establishment in Germany, supplied seating to the automotive industry. In 2016, Adient DE entered into a contract with Adient RO (a Romanian company in the same group and with its place of establishment in Romania) to provide a comprehensive service of both the manufacture and assembly of upholstery components, together with certain ancillary and administrative services. The ancillary services consisted of taking delivery of, inspecting and storing the raw materials storing and storing finished products. Adient DE purchases the raw materials and remains the owner of those raw materials and finished products throughout the process. It also appeared that Adient RO assisted in onward sales of the finished products in Romania by, for example, communicating with carriers, initiating shipping orders and communicating with customers.

Adient DE was registered for VAT in Romania as a non-established person for the purposes of its purchases in Romania and for supplies to its customers of the products manufactured by Adient RO. However, for the purposes of the receipt of the toll manufacturing services from Adient RO, Adient DE used its German VAT number. As such, no VAT was charged in Romania, and instead the supplies were subject to the reverse charge procedure in Germany.

The Romanian tax authorities took the view that the place of supply of Adient RO's services under the toll manufacturing agreement was in Romania and that Romanian VAT should have been accounted for. It considered that Adient DE had a fixed establishment in Romania, having the necessary technical and human resources available to it consisting of the premises and personnel of Adient RO.

Decision of the CJEU

The CJEU has endorsed the opinion of the Advocate General in this case, setting out guidance on the question whether, and if so when, a subsidiary or other group company might amount to a fixed establishment of another group company.

Firstly, the CJEU has again stressed that the mere fact that the two companies engaged in the supply are part of the same group or bound together by an exclusive contract cannot make one the fixed establishment of the other, reiterating that "as the Court has repeatedly held, given that a legal person, even if it has only one customer, is assumed to use the technical and human resources at its disposal for its own needs, it is only if it were established that, by reason of the applicable contractual provisions, a company receiving services had the technical and human 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".

A service provider will, in principle, act in its own name and economic interests as an independent contract partner, not as a controlled component of the other contracting partner. As a result, "the fact that the parties are bound by an exclusive service contract does not of itself mean that the service provider's resources become those of their customer, unless it is shown that, under that contract, that provider does not remain responsible for his or her own resources and does not provide his or her services at his own risk".

Secondly, the CJEU stressed the importance of context to the question of whether a fixed establishment exists. In particular, the fact that a company may have a fixed establishment for the purposes of making supplies in a Member State doesn't mean it has a fixed establishment for the purposes of receiving supplies. Accordingly, in this case, it was necessary to draw a distinction between, on the one hand, the supplies of services from Adient RO to Adient DE and, on the other hand, the sales and supplies of goods arising from those services that Adient DE carried out from Romania. Therefore, the fact that Adient DE may have resources to carry out supplies of goods from Romania resulting from the supply of services from Adient RO was "not relevant to determining the existence of a fixed establishment for ascertaining the place of supply of those services".

Thirdly, the CJEU again reiterated the point that "the same means cannot be used both by a taxable person... to provide services and... to receive the same services within a supposed fixed establishment". The existence of a fixed establishment of the recipient of the services presupposes that it is possible to identify human and technical resources which are distinct from those used by the supplier for the fulfilment of it own supplies. Furthermore, the CJEU agreed with the AG's analysis that, even if the fixed establishment could be both supplier and recipient of the services, that would amount to a non-taxable internal transaction of Adient DE. As such, if that were the correct analysis, no Romanian VAT would be due in any case.

Comment

Given the earlier decisions in Cabot Plastics and Berlin Chemie and their very similar fact patterns, it is perhaps surprising that Court felt there was any need for an AG opinion at all in this case. The answers to the questions seem to follow directly from those earlier decisions. Nevertheless, it is clearly helpful to have the Court's further clarification of these fixed establishment issues and especially the greater clarity around the differing nature and requirements for a fixed establishment in the context of making and receiving supplies.

In addition, the decision (and the AG opinion before it) highlight the secondary role of the fixed establishment concept in general, quash any idea that service arrangements in general between group companies might be remotely sufficient to give rise to a fixed establishment and point out the fallacy in the argument that a service provider might also be the fixed establishment of the customer for the purposes of receiving those supplies.