Tax News, May 2022

The May issue of EY Tax news highlights two new developments:

• The Court of Justice of the European Union has ruled on the existence of VAT fixed establishment in the case of a related party exclusively providing services to the company

• Spain introduces new indirect tax on non-reusable plastic packaging as of 1 January 2023

The Court of Justice of the European Union has ruled on the existence of VAT fixed establishment in the case of a related party exclusively providing services to the company (C-333/20, Berlin Chemie A. Menarini SRL)

On 7 April 2022, the Court of Justice of the European Union issued a judgment in case C-333/20, in the area of VAT fixed establishment.

It should be noted at the outset that fixed establishment is one of the most important concepts in the field of VAT, as it impacts the determination of the place of taxation for services. The criterion for the existence of establishment is the existence of "sufficient and permanent technical and human resources to provide / receive services". With such a loose criterion, the issue of fixed establishment has often been addressed by the Court of Justice of the European Union ("CJEU").

The latest in a series of such judgements deals with the case of Berlin Chemie/Menarini Pharma GmbH, a German company with a 95% stake in the Romanian company Berlin Chemi A. Menarini SRL.

The German company is registered for VAT purposes in Romania, as it supplies goods on its territory. The activities of the Romanian company (also registered for VAT purposes in Romania) are public relations and communications management consultancy, wholesale of pharmaceuticals, management consulting, advertising agency services and (market) research services. The companies entered into an agreement on marketing, regulatory services, advertising, and representation services, further to which the Romanian company undertook to actively promote the German company's products in Romania (e.g. through marketing activities), in line with the German company's strategy. The Romanian company did not charge VAT on invoice for its services, as it considered that the place of supply of said services was in Germany.

Following the tax audit of the Romanian company, the Romanian Tax Authorities considered that the German company had received the services provided by the Romanian company in Romania, where it had a fixed establishment. Although the technical and human resources for the provision and receipt of services belonged to the Romanian company, the Romanian Tax Authorities concluded that the German company had uninterrupted access to them and thus met the criteria for the existence of a fixed establishment under national law. The Romanian Tax Authorities therefore issued a tax assessment and imposed payment of additional VAT to the Romanian company. In the context of dispute between the Romanian company and the Romanian Tax Authorities, the Court of Appeal in Bucharest referred the question of the existence of fixed establishment to CJEU.

According to the judgement by CJEU, a company which has its registered office in one Member State does not have a fixed establishment in another Member State on the ground that that company owns a subsidiary there that makes available to it human and technical resources under contracts by means of which that subsidiary provides, exclusively to it, marketing, regulatory, advertising and representation services that are capable of having a direct influence on the volume of its sales. In reaching this decision, CJEU put forward two arguments in particular:

1. Although the existence of a fixed establishment does not require the company to have technical and human resources in its possession, it must dispose of them as if they were its own.
2. The fixed establishment must be able to accept the services provided to it, and the technical and human resources with which the services are provided cannot be the same as the resources with which the services are received / used.

The judgment thus imposes significant restrictions on creation of a fixed establishments in the case of services provided between related entities.

Next steps

Judgments of the Court of Justice of the European Union are binding for the Tax Authorities of the EU Member States. As a rule, Slovenian Tax Authorities do not issue (new) guidelines following court rulings, but it is expected that the ruling will affect their position regarding the existence of fixed establishment in the cases of services provided between related companies.

Spain introduces new indirect tax on non-reusable plastic packaging as of 1 January 2023

On 9 April 2022, the Spanish Official State Gazette published Law 7/2022 on Waste and Contaminated Soils (referred to as the Law). The new Law aims to establish the principles of the circular economy, as well as contribute to the fight against climate change and the protection of the marine environment.

Specifically, the Law addresses the obligation for Spain to transpose two European Union (EU) Directives: first, Directive (2018/851) which will modify the Waste Framework Directive and second, the Single-Use Plastics Directive (2019/904), where the purpose is to reduce the environmental impact of certain plastic products.

The Spanish legislature has approved a new tax on non-reusable plastic packaging, which will take effect as of 1 January 2023. The new tax has a very broad scope, tax rate of EUR 0,45 per kg of non-recycled plastic packaging. It is configured similarly to the new plastic packaging tax approved in Italy, which is also expected to enter into effect on 1 January 2023. However, there are greater differences compared to the plastic packaging tax already in force since 1 April 2022 in the United Kingdom.