Fixed Establishment VAT in Parent-Subsidiary Supplies – Taxation

European Union: Fixed Establishment VAT in Parent-Subsidiary Supplies

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The Court of Justice of the European Union (the “CJEU“) clarified the notion of “permanent establishment” for VAT purposes. In the recently published case Berlin Chemie A. Menarini(decision C-333/20 of 7 April 2022), the CJEU ruled that a foreign subsidiary which provides services exclusively to its parent company established in another Member State does not automatically qualify as a permanent establishment of the company mother.

A German company involved in the marketing and sale of pharmaceutical products entered into a service contract with its Romanian subsidiary for the purposes of promoting, advertising and marketing its sales in Romania. The German parent company was the sole customer of its Romanian subsidiary and had, inter alia, access to the subsidiary’s technical resources such as computers, operating systems and vehicles. The German parent company supplied its products directly to its customers in Romania.

The Romanian subsidiary invoiced the German parent company for VAT-free marketing services under the general B2B place of supply rules (i.e. with the services located for VAT purposes in Germany, the country of the recipient). The Romanian tax authorities contested this position, considering that the German parent company had sufficient technical and human resources located in Romania (i.e. access to the resources of the subsidiary) to carry out an economic activity in Romania, which would shift the place of delivery of marketing services from Germany to Romania. Therefore, VAT was imposed in Romania on these services.

In its decision, the CJEU recalled that, for a place to qualify as a permanent establishment, (i) the company must have its own human and technical resources there (or resources at its disposal as if it were its own), and (ii) this resource structure must enable it to receive the services provided to it and to use them for the purposes of its own economic activity.

The CJEU added that the same human and technical resources cannot be understood as providing and receiving the same services at the same time, which means that the structure of resources in Romania cannot be understood as being used for the provision by the subsidiary and receipt by the parent company.

Since the German parent company is therefore to be understood as using its German-based resource structure to carry out its economic activities, the criteria for a permanent establishment were not met and the CJEU could not classify the Romanian subsidiary as permanent establishment of the German parent company.

This decision further clarifies the concept of “permanent establishment” and clarifies whether the place of taxation can be moved on the basis of the human and technical resources of third parties. Nevertheless, economic reality remains the fundamental criterion for interpreting the VAT rules, a process which continues to require a case-by-case analysis of the facts in question. Many questions about how to apply the concept of “permanent establishment” remain unanswered and will depend on the circumstances of each business model.

The Arendt VAT team remains at your disposal for any questions arising in this area.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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