In Luxembourg, a number of investment fund structures include Luxembourg-based companies which own and exploit directly a real estate asset located in another EU Member-State than Luxembourg.
Such companies should in principle hold a VAT number both in their EU Member-State of establishment (Luxembourg) and in the EU Member-State where the real estate asset is located. Has this now been challenged by the latest ruling of the European Court of Justice?
One year ago, the “Titanium”, Case C-931/19 of the Court of Justice of the European Union (“CJEU”) ruled on the particular case of a Jersey company owning and exploiting in a “passive” manner an immovable property located in Austria (without any own local staff, property management was delegated to a third party). At this occasion, the European judges reiterated that a “fixed establishment” for VAT purposes implies a minimum degree of stability derived from the permanent presence of both the human and technical resources necessary for the provision of letting services (cumulative conditions). A “foreign” owner of a property which does not have his own staff to perform immovable property letting services is not to be considered as maintaining a fixed establishment.
Considering the increasing number of litigations linked to this particular topic, this CJEU case-law is consistent with the heavily debated “fixed establishment” definition stated into the EU VAT Regulation 282/2011 (article 11). Preamble of the same Regulation expressly states that CJEU case-laws are relevant to facilitate the interpretation of the concepts.
Practical VAT question raised in EU Member-States with extensive “Fixed Establishment” approach
Although the purpose of the “fixed establishment” definition is to determine the place of taxation of services (i.e. which EU country VAT rules to apply), another question resides in determining (among the lessor and the lessee) who is liable to pay VAT in the letting transaction.
The main contribution of this CJEU case-law has been to challenge the extensive interpretation of the “fixed establishment” concept as applied by local VAT Authorities in some EU Member-States - namely Austria, Germany and Spain. In these countries, local VAT Authorities used to consider that the lessor qualifies as a Fixed Establishment and is consequently liable to declare and pay VAT due on the rents. Further to the CJEU’s decision, “foreign” lessors with a real estate asset in such countries had to reconsider whether it is still correct to invoice VAT on the rents charged to business lessees (“B2B”) and to remain VAT registered locally.
“Post-Titanium”: no change of approach in most of the EU Member-States
According to article 194.1 of the EU VAT Directive (2006/112/EC), when a supply of goods or services is carried out by a taxable person who is not established in the Member State where the VAT is due (i.e. where the real estate asset is located), the purchaser/recipient of goods/services may be liable to pay and declare VAT locally under the reverse charge mechanism.
EU Member-States where article 194.1 VAT Directive is not implemented
Few EU Member States have not implemented this provision in their respective national VAT legislation. This is notably the case in Greece, Malta, Lithuania, and Luxembourg. In these EU Member-States, the qualification of a foreign real estate company as “fixed establishment” will not have any impact since, as per local VAT legislations, the lessor (supplier) remains liable to declare and pay VAT locally.
EU Member-States where article 194.1 VAT Directive is implemented
Besides the previously stated exceptions, most EU Member-States1 have implemented this provision in their respective national VAT legislation. In these EU Member-States, the “Titanium” case-law has simply not had any VAT impact. The approach of the local VAT Authorities already consisted in considering a “foreign” real estate company not as a “fixed establishment”, the business lessee (”B2B”) being liable to pay and declare local VAT under the domestic reverse charge mechanism. Back in February 2019, in a substantially similar case which took place in the Netherlands, the EU Member-Sta Dutch Supreme Court2 had already ruled that the rental holiday home of a foreign owner was not to be regarded as a fixed establishment for VAT purposes.
“Post-Titanium”, it seems that no further administrative guidance to implement this CJEU case-law has been issued in these EU Member-States. Same situation in Germany where a change should have however been expected as the approach of the local VAT Authorities is not in line with “Titanium” decision3.
The only exceptions are Spain and Austria where the criteria of the local VAT Authorities have been formally amended. Now, a “foreign” real estate company should in principle charge its rents to business lessees (“B2B”) “free-of-local-VAT” and should not remain VAT registered. Any local input VAT incurred by the foreign lessor may be recovered through an EU VAT Refund procedure (i) initiated in the EU Member State where the foreign lessor is established; (ii) in the EU Refund country if the foreign lessor is established outside the European Union territory.
On the one hand, the clear benefit of the “Titanium” decision is to have clarified on the local VAT registration requirements not only for foreign real estate companies but also for other taxable persons with installations such as warehouses or IT servers in EU Member States where they are not established and do not have their own employees.
On the other hand, some administrative practicalities are to be expected in these two EU Member States (Austria and Spain) where local VAT approach has recently been amended:
- A VAT deregistration procedure for a significant number of foreign companies will likely trigger an administrative workload that local VAT Authorities may take time to complete properly.
- The proper monitoring of local input VAT regularization via the capital good scheme is only possible through a classic VAT returns scheme. EU VAT refund procedures may not disclose the degree and granularity of information needed for this purpose.
- The foreign real estate companies will have to address to all their different service providers to use exclusively the VAT number granted in the EU Member State of establishment, for the needs of their invoicing.
Some remaining “grey” areas
Some practical questions remain unsolved.
The CJEU’s “Titanium” case-law did not elaborate further on the exact meaning of “own staff”. Indeed, despite the fact that property management is outsourced to a third-party supplier, a landlord may intend to set the contractual arrangements in a way to keep a certain degree of control with regards to the financial yield as well as decision-making for the day-to-day management of the property. In such circumstances, the third-party supplier should have no additional power than simply executing landlord’s decision, similar to an employee of the same landlord.
In this respect, the CJUE has very recently ruled (“Berlin Chemie AG”, C-333/20) that a German-based company does not have a “fixed establishment” in Romania on the ground that it has used the technical and human resources of its Romanian subsidiary for its exclusive own needs. It is only if it were established that, by reason of the applicable contractual provisions, the German company had the technical and human resources of the Romanian company at its disposal as if they were its own that the German company could have a suitable structure with a sufficient degree of permanence in Romania, in terms of human and technical resources. A matter of factual interpretation which is, according to CJEU’s statements, the prerogative of referring national courts.
The concept of “fixed establishment” is an “open door” and continues to demand a particular attention from VAT practitioners. Luxembourg entities, which own real estate in another EU Member State, are strongly recommended to analyze in-depth whether there are any changes in their VAT obligations to be fulfilled in the Member State, where the real estate is located.
1EY Global Indirect Tax Survey, 10 March 2022
2Dutch Supreme Court decision dated 08 February 2019 (Nr 17/04018).
3EY Global Indirect Tax Survey, 10 March 2022
