In Case C-547/18, Dong Yang Electronics, the ECJ has been asked to revisit the definition of fixed establishment (FE) for VAT purposes and to clarify whether a subsidiary can be considered an FE of its parent. 

How the ECJ has ruled to date

• A separate entity may constitute an FE of another taxable person, but only if it is not independent from that taxable person.
• The mere fact that a subsidiary is wholly owned does not necessarily mean that it is not independent.
• The fact that a parent company, by virtue of its shareholding and power to appoint directors, is in a position to formally control the policy and management of its subsidiary is not sufficient to compromise the independence of that subsidiary.
• A subsidiary can constitute an FE of its parent company if it "merely acts as an auxiliary organ of its parent" (Case C-260/95, DFDS, para. 25). This assessment requires a detailed review of the contractual relationships between the parent and its subsidiary.
• The situation in which a formally independent legal entity may constitute an FE should be considered exceptional (AG Kokott’s Opinion in Case C-605/12, Welmory, para. 36: "[...] the judgment in DFDS is not, however, capable of general application, as the Court recently found in the judgment in Daimler").

AG Kokott's findings in Dong Yang Electronics

On 14 November, AG Kokott delivered her opinion in Case C-547/18, Dong Yang Eletronics, a case referred by the Provincial Administrative Court in Wroclav, Poland. The case concerns the concept of a VAT FE.

AG Kokott opined that the Polish tax authority’s approach to considering a dependent, but legally autonomous, subsidiary an FE of its foreign parent company was incorrect in the absence of an abusive practice. She also pointed out that:

• An independent subsidiary cannot be considered an FE of its parent company. As AG Kokott stated in her opinion in Welmory, the principle of legal certainty precludes a legal person from being considered the FE of a different legal entity.
• The principle of legal certainty can be disregarded only if the contractual structure chosen by the customer infringes the prohibition on abusive practices.
• The contractual relationships between the parent and its subsidiary in the case in question were not aimed – even from an economic perspective – at achieving a VAT advantage. Indeed, even if it were assumed that the services had been provided to the FE of the parent, the amount of Polish tax revenue would not have been affected at all, because the FE would have been entitled to deduct the VAT in Poland.
• Suppliers may be required to exercise a reasonable degree of care in determining the correct place of supply, but this does not include seeking out and verifying inaccessible contractual relationships between contracting partners (i.e., the client) and their related parties (e.g., the client's subsidiary).

Where do we go from here?

The concept of FE is “relevant” for determining: (a) the place of supply of services, other than services connected with immovable property, and (b) the person liable for VAT. Considering the potential impact of the administrative penalties applicable when an FE is deemed to be located in a Member State (C-111/14, GST - Sarviz Germania), companies likely to be impacted may wish to reconsider their filing and audit positions pending the ECJ’s decision in Dong Yang Eletronics.

Indeed, AG Kokott’s opinion is particularly relevant for countries where the local tax authority holds that subsidiaries (e.g., toll manufacturers and/or owners of a call-off stock warehouses) constitute an FE of a foreign related company in order to assess local VAT using the ordinary mechanism (instead of the reverse charge) on the tolling fee (or the rental fee) and any subsequent local sales of end products.

Based on the principle of legal certainty, the ECJ is expected to follow the conclusion reached by AG Kokott and limit the scope of DFDS to abusive practices.

Finally, FE is a concept of EU law, the interpretation of which cannot be left to the discretion of each Member State. To reduce the risk of differing interpretations, taxpayers may wish to request a VAT cross-border ruling. While the procedure does not guarantee that Member States will agree on the VAT treatment of the envisaged transactions (i.e., whether an FE is deemed to exist in a given Member State), Member States will at least consult each other. This duty of co-operation has been confirmed by the ECJ: “Regulation No 904/2010 must be interpreted as meaning that the tax authorities of a Member State which are examining whether VAT is chargeable in respect of supplies of services that have already been subject to that tax in other Member States are required to send a request for information to the tax authorities of those other Member States when such a request is useful, or even essential, for determining that VAT is chargeable in the first Member State” (C-419/14, WebMindLicenses, para. 59).