A subsidiary does not always give rise to a fixed establishment under the VAT regime

On 7 May 2020, the Court of Justice of the European Union (hereinafter referred to as “CJEU”) passed a significant ruling in the Polish case C-547/18 Dong Yang Electronics indicating a direction in determining a fixed establishment (hereinafter referred to as: “FE”) for VAT purposes.

The background of the case

The background to the request for a preliminary ruling was focused on determining the place of taxation of services provided by the Polish company Dong Yang Electronics sp. z o. o. (hereinafter referred to as: “’Dong Yang) to a non-EU company.

Don Yang signed an agreement with Korean company LG Display Co. Ltd.(Korea) (hereinafter referred to as: “LG Korea”) to provide assembly services of PCB (printed circuit boards, hereinafter referred to as “PCB”) from the sub-assemblies and components owned by LG Korea. Physically, these materials were customs-cleared and then delivered to Don Yang by LG Korea’s subsidiary, LG Display Polska sp. z o. o. (hereinafter referred to as: “LG Polska”). Dong Yang transferred the assembled PCB back to LG Polska for production other modules sold by LG Korea as their owner. LG Korea has assured Don Yang that it does not have FE in Poland, has no employees, and has no real estate or technical facilities in Poland. Dong Yang issued invoices for its assembly services to LG Korea, considering them as non-taxable for the VAT purposes in Poland.

A dispute between the Polish company and the tax office has arisen. According to the Polish tax authorities, Dong Yang should have issued invoices with Polish VAT because of the alleged FE of LG Korea, which was supposed to be LG Poland with its registered seat in Poland. As a consequence, the CJEU was required to consider the following questions:

• Can it be inferred, from the mere fact that a company established outside the European Union has a subsidiary in the territory of Poland, that a FE exists in Poland within the meaning of Article 44 of the VAT Directive and Article 11(1) of the Implementing Regulation (UE) No 282/2011?
• If the first question is answered in the negative, is a third party required to examine contractual relationships between a company established outside the European Union and its subsidiary in order to determine whether the former company has a FE in Poland?

CJEU ruling

The CJEU concluded that:

• a service provider cannot deduce that a non-European company has a FE in the EU Member State from the mere fact that it has its subsidiary in that EU Member State, and
• a service provider is not required to examine the contractual relationships binding these two companies to determine a FE.

The CJEU emphasized that the economic and commercial reality shall be found as a fundamental criterion for applying the common VAT system. The recognition of a certain place as a FE cannot, therefore, depend solely on the legal status of the entity concerned.

Hence, while it is possible for a subsidiary to constitute a FE of its parent company, such qualification depends on the substantive conditions laid down by the Implementing Regulation (UE) No 282/2011, that have to be assessed in the light of economic and commercial reality.

It is worth noting that, although the ruling applies to a FE of a foreign entity, undoubtedly it is important for entities established in the EU.

ASB Tax – how can we help?

In connection with the current pro-fiscal approach of the tax authorities to determine foreign entities a FE in Poland – it is worth ensuring that your VAT settlements are secure.

We can provide you comprehensive support in the following areas:

• analysis of the business activity carried out in Poland (owned and used resources, analysis of agreements), in order to determine the risk of the examined structure as a FE of a foreign entity, with special reference to potential tax and financial consequences;
• preparation of a so-called “defense file” to justify the correctness of the business model and approach to the accounting method
• applying for an individual tax ruling for the tax security purposes against negative tax consequences of applied tax treatment, as well as reviewing the obtained tax rulings in respect of their actual protection value for the taxpayer;
• providing support in the scope of ongoing tax audits and tax proceedings conducted by the Polish tax authorities, as well as court proceedings, by applying favorable argumentation and strategy in the conducted dispute;
• implementation of new business models and the tax implications thereof.