CJEU: Subsidiary not automatically a VAT fixed establishment

The CJEU ruled in the Dong Yang case (C-547/18) of 7 May 2020 that the mere fact that a foreign company has a subsidiary in an EU Member State does not automatically lead to the conclusion that it has a fixed establishment for VAT purposes in that Member State. However, the CJEU does not exclude the possibility that a subsidiary of a foreign company can be a fixed establishment for VAT purposes. Therefore, a local service provider should assess whether the foreign entity to whom he provides a service has a fixed establishment through a subsidiary or not and whether he provides a service to the foreign entity or to that fixed establishment. However, the service provider is not required to investigate extensively the relations between the foreign company and its local subsidiary.

The subsidiary can nevertheless be a fixed establishment

Contrary to the opinion of A-G Kokott, the CJEU ruled that a local subsidiary can, under specific circumstances, constitute a fixed establishment of its foreign parent company for VAT purposes.

This position is striking since it was generally accepted that this could only be the case in the context of fraud or abuse. It appears that this is not the case. A service provider is required to assess, on the basis of the substantive conditions set out in the VAT Directive and the Implementing Regulation, whether he provides his service to a foreign company or to its fixed establishment. The legal form of this establishment is irrelevant.

Obligation to investigate for the service provider

Once the service provider has determined that a subsidiary of the customer is a fixed establishment, it must determine whether it supplies its services to the foreign parent company or to the fixed establishment / subsidiary. In doing so, he should check whether the nature and use of the service provides a definitive answer as to whether the supply is made locally. If this investigation does not provide clarity, the service provider must examine whether there are any indications of the existence of a fixed establishment for VAT purposes in the relevant contract, the order form or the VAT number allocated by the customer’s Member State and communicated to the service provider by the customer. Another important element is whether this fixed establishment is or is not the entity that pays for the service.

If this line of inquiry also does not provide a definitive answer, the basic principle is that the foreign entity is the recipient of the service and therefore no local VAT is due.

Furthermore, the CJEU ruled that the service provider is not obligated to examine the contractual relationships between the two entities during its assessment.

Consequences for practice

It is good news that the CJEU clarifies that a subsidiary is not by definition a fixed establishment, as opposed to what has been practice in some Member States. It is also positive that the CJEU emphasizes once again that the primary point of reference for taxation of cross border services is the main establishment. The place of taxation will only shift as a result of a local fixed establishment in exception to that main rule and if certain conditions are fulfilled.

Whether this decision by the CJEU marks the end of the often complex discussions taking place in several Member States with respect to the concept of the fixed establishment remains to be seen, as the CJEU explicitly allows for the possibility of a subsidiary to constitute a fixed establishment of its parent company, if certain conditions are met.

As a consequence, when providing services to a foreign company with a domestic subsidiary, service providers will have to substantiate that (and for what reason) no VAT should be invoiced to the foreign entity. It must be clear that the service provider conducted sufficient research in order to determine whether it in fact provided its services to a local fixed establishment.