Having in mind both the ambiguous legislation combined with the jurisprudence of the Court of Justice of the European Union (CJEU) which has not clearly defined the criteria for establishing a fixed establishment in the cases decided so far, the issue of fixed establishments is creating controversy in tax inspections, leading to uncertainty and additional VAT obligations for companies.
According to the general VAT rules, the services supplied to a taxable person are taxable in the country where the beneficiary has its registered office or a fixed establishment to which the respective services are supplied. While determining the place of business is fairly straightforward, identifying when a company creates a fixed establishment requires a more detailed analysis and the assessment of several criteria. According to the law, a non-resident generates a fixed establishment when it has human and technical resources in Romania through which it can regularly carry out supplies of goods and/or services. However, the concept of regular supplies is not clearly defined, nor is the way in which the non-resident must possess the technical and human resources. Implicitly, the authorities' interpretation may be more restrictive or more extensive, and most often it leads to litigation.
Over the years, CJEU has ruled repeatedly, clarifying more or less the challenges associated with the concept of a fixed establishment. In the first landmark decisions, (the judgements in the cases C-168/84 Berkholz, C-260/95 DFDS, and C-260/95 Aro Lease), CJEU emphasized the importance of meeting the two conditions for creating a fixed establishment of business, namely the degree of permanence and suitable structure in terms of human and technical resources. To create a fixed establishment of business, it is also relevant for these resources to allow the provision of services independently.
In the last two years, two other landmark decisions on this concept have been published, in cases C-547/18 Dong Yang Electronics, respectively C-931/19 Titanium Ltd. In the Polish case Don Yang Electronics, the Court deemed that having a branch on the European Union territory does not automatically give rise to a fixed establishment for the non-resident parent company, while the supplier cannot be required to analyse the contractual relationships between his business partner and its branches in order to determine whether the latter can be considered fixed establishments from a VAT point of view. Subsequently, in the Austrian case Titanium Ltd., CJEU held that a non-resident does not generate a fixed establishment if he owns a building which he rents out without having his own staff to carry out the rental service. In CJEU’s view, the use of the staff of a subcontracted company is not sufficient to establish the existence of a fixed establishment and should be taken into account, in particular, the decision-making staff with respect to the rental of real estate. Bianca Vlad Partner, Tax
The most recent and perhaps one of the most awaited cases that analyses the concept of fixed establishment was ruled by CJEU last month. The case C-333/20 Berlin Chemie concerns a dispute between a Romanian subsidiary of a German company and NAFA. The fixed establishment issue was analysed from the perspective of a business model used in the pharma industry, but the CJEU’s decision may have a wide applicability in all the sectors where there are business relationships between affiliated companies established in different jurisdictions.
In the case at hand, the Romanian subsidiary (Berlin Chemie) supplies marketing, regulatory, and advertising services for the promotion of pharmaceutical products traded by the non-resident company. Berlin Chemie issued invoices without VAT to the German parent company, considering that the place of supply is the place where the beneficiary of the services has its registered office. The Romanian tax authorities considered that, in fact, the non-resident company has a fixed establishment in Romania since it has access to technical and human resources through the control it has over the Romanian branch. Thus, the services should have been invoiced with Romanian VAT. In this case, the authorities also found relevant the behaviour of the company in Romania and ascertained that their activity targets demand growth for the products traded by Berlin Chemie. In this regard, the authorities had in view the fact that the Romanian company having as its sole client the non-resident company from Germany, was involved in taking orders from distributors and forwarding them to the German company, as well as in processing and sending the invoices, carrying out inventories, obtaining the necessary permits for trading pharmaceutical products, etc.
The decision ruled by CJEU was in favour of the taxpayer. The Court considered that the services supplied by the branch in Romania were received by the non-resident company, which yet uses its own technical and human resources located in Germany (and not the Romanian branch’ resources) to carry out sales of pharmaceutical products in Romania. The Court calls on to the fact that same human and technical resources cannot be used both to provide and receive the same services. Alexandru Stanciu Senior Manager, Tax
As far as the condition of having a suitable structure in terms of human and technical resources is concerned, CJEU made it clear that it is not necessary for a taxable person to own the resources, but it is necessary to be able to dispose of those human and technical resources as an owner (for example based on services agreements which could not be terminated on a short notice).
The existence of an adequate structure of human and technical resources with a sufficient degree of permanence must be analysed in the light of economic and commercial reality. The principles of VAT require that, as far as possible, the services to be taxed at the place of consumption – in this context, the fixed establishment concept was created, to prevent any situations which would misrepresent the good operation of the VAT system and to avoid double taxation or non-taxation. Such objectives could not be achieved even if the concept was interpreted restrictively (in the sense that the existence of a fixed establishment would be conditioned by the existence of a right of ownership over the resources), nor whether in order to shift the taxation of certain services from one Member State to another, it was sufficient for a taxpayer to secure his human and technical resources by appointing certain service providers.
Although the CJEU decision is in line with the previous cases and confirms the importance of legal certainty, the current practice of NAFA’s actions indicates a different approach, so that we are yet to see how the authorities will interpret the concept of fixed establishment in future tax audits. Although the CJEU judgments are generally long awaited by companies, the responses of the Court are not exhaustive and one should consider their applicability is restricted to the specific cases which are analysed, while the variety and evolution of the business models make them more difficult to be applied on a wider scale. Miruna Cîrstea Senior Consultant, Tax
In this context, companies should review their business models, not only from a commercial and operational perspective, but also from a tax perspective, taking into consideration the materiality of tax obligations which can be assessed following a re-classification of the VAT treatment. We should have in mind that, at least at the declarative level, the NAFA announced a strategy focused on the increase of audits in the upcoming period and we expect the fixed establishment topic to remain on their agenda.
Emilia Popa, Head of Marketing and Communication, Mazars Romania
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