Fixed establishment or not? Who has the burden of proof?

In a global world, multinational companies have most certainly asked themselves on numerous occasions whether VAT needs to be added or not to their invoices issued as a supplier.

Regardless of the answer, knowing where the burden of proof lies and demonstrating correct VAT due diligence can save the taxable person tremendous time and financial resources. In this article, we analyze the latest trends emerging from the Court of Justice of the European Union (CJEU) in relation to determining what is a fixed establishment for VAT purposes, and what a taxable person can do to mitigate the related risks.

When dealing with VAT and acting in good faith, important questions arise as to what level of information the taxable supplier is supposed to obtain and to what extent it must analyze the business and commercial flows of the invoiced client, in order to determine whether VAT should be charged, or whether any sign of fraud or abuse exists.

Dong Yang and the latest benchmarking

In the latest case[1], the CJEU assessed the conditions for existence of a fixed establishment, as well as to what extent a service provider is required to analyze the contractual relationships when deciding whether or not to charge VAT. The Court departed from the view of the Polish Tax Chamber which was mainly that the taxable person had an obligation to examine who the real beneficiary was and that a subsidiary as such should be deemed to be a fixed establishment.

The conditions for a fixed establishment and the supporting principles of law

The concept of fixed establishment has already been treated by the CJEU in other cases. In Berkholz[2], the Court came to the conclusion that a fixed establishment must be of a certain minimum size, with both human and technical resources for the provision of services. In Welmory[3], the Court ruled that a fixed establishment must be characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs.

The place of supply of services is no longer determined by reference to the taxable person supplying the services. The exception of taxing at the place of the “fixed establishment” must be determined in relation to the taxable person receiving the services. It was also ruled that the fact, that the economic activities of two companies linked by a cooperation agreement form an economic whole, is not material for determining if a fixed establishment exists.  Given the previous approaches, it is no wonder that the Court disagreed that the mere existence of a subsidiary can be regarded as a fixed establishment, as the tax authorities had contended. The argument that there was no taxable person (i.e. the company did not employ staff, nor own property or technical equipment in the other State) prevailed. The assessment must be made in the light of the economic and commercial reality, a fundamental criterion for applying the common VAT system[4]. In parallel to the previous case-law, it may be reasonably inferred that the tax authorities in the Dong Yang case had not satisfied their burden of proof in order to demonstrate that the whole economic and commercial reality pointed toward a taxable supply in Poland.

However, in our view, the most important point relates to the arguments on principles and the burden of proof. While there is an underlying principle of abusive practices in EU law[5], the lack of an abusive practice does not excuse the provider for neglect in making the necessary far-reaching checks to establish when and where VAT is applicable.

_{[1] Dong Yang Electronics sp. Zoo v. Dyrektor Izby Administracji Skarbowej we Wrocławiu, Case C-547/18, para 16. 
[2] Berkholz v. Finanzamt Hamburg, Case C-168/84
[3] Welmory sp. Zoo v. Dyrektor Izby Skarbowej w Gdansku, Case C-605/12, para 58
[4] Budimex S.A. v. Minister Finansov, Case C-224/18, para 27
[5] See Halifax plc and Others v. Commissioners of Customs & Excise, Case C-255/02}