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2016 VAT/GST fixed establishment survey

In 2016, we surveyed EY Indirect Tax professionals in 67 countries and asked them how the term “fixed establishment” for VAT/GST is defined in their local tax legislation, whether the concept of FE for VAT/GST is aligned with the concept of permanent establishment for direct taxes in their countries and whether the current definition of FE is under review as a result of projects such as the Base Erosion and Profit Shifting (BEPS) Actions or Court of Justice of the European Union (CJEU) case law.

Survey findings: Q&A

  • Is the term fixed or permanent establishment for VAT/GST purposes defined your country’s domestic VAT/GST law?
    EY - VAT/GST defined in 48 of 67 countries

    The term “FE” for VAT/GST purposes is specifically defined in the primary legislation of only 13 of 67 countries surveyed; however, 35 of these countries rely on another source to define the term (e.g., EU legislation, case law and regulations). Therefore, in total, the term “FE” for VAT/GST is defined in legislation in 48 countries.


    Spotlight on the EU

    In the EU Regulations, the term “fixed establishment” for a taxable person is characterized by a “sufficient degree of permanence and a suitable structure” relating to “human and technical resources to enable it to (i) provide the service which it supplies or (ii) receive and use the services supplied to it for its own needs. ” The EU defines the concept of a fixed establishment both at the supplier side and at the recipient side.”1

  • Is this definition under current review or likely to change (e.g., as a result of BEPS or CJEU case law, changes in the digital economy, etc.)?
    EY - VAT/GST defined in 16 of 67 countries

    Forty of 67 countries responded that the definition is not currently under review. However, this is not the whole story. In 5 countries (Belgium, Brazil, Israel, Lithuania and South Korea) respondents said that the definition is under review and another 11 countries indicated that the definition could well come under scrutiny (Armenia, Australia, Austria, Canada, Egypt, Jamaica, Malta, the Philippines, Turkey, the UK and Uruguay).

    Significantly, these countries include EU Member States and countries that are actively reviewing the impact of the digital economy on the local VAT/GST system.


    Changing FE rules and interpretations

    In the past, the generally accepted basis for an FE was that a supplier must have both the “human and technical resources” necessary in a place to provide the service from that location. However, in the digital economy, human resources are becoming less necessary to providing cross-border services (e.g., in the cloud), causing this definition to be looked at more critically.

    For example, some countries (e.g., Italy, Israel and Saudi Arabia) are beginning to explore the concept of a digital company having a “virtual FE”, arising not from any physical presence in a country but from its online presence there, for example, represented by a website accessed by large numbers of users based in that country.

    Many more digital businesses are likely to be drawn into the VAT/GST net in multiple countries if this concept becomes widespread, which will greatly increase their compliance and reporting obligations.

    Recent EU developments: in addition to the possible impact of the digital economy on the concept of FE, recent case law from the CJEU has made it clear that a third party can constitute an FE for a supplier. For business-to-business (B2B) supplies of services, the concept of FE extends to the purchaser as well as the supplier, as was clarified per 1 July 2011 in EU Regulation 282/2011.

    • FE for suppliers: following the CJEU judgment in the case of Welmory (C-605/12), issued in October 2014, certain tax authorities are interpreting the phrase “fixed establishment” more broadly than what’s outlined in the preceding EU case law — to include third parties. Some EU tax administrations are pursuing businesses that utilize assets or other resources of an affiliate or third party located in their Member State and declaring that they have an FE.

    • FE for B2B customers: the concept of “fixed establishment of the recipient” of a service was introduced in the VAT directive in 2010 (and the EC Regulation of March 15, 2011). In Welmory, the CJEU issued its first decision on the place of location and the existence of a fixed establishment of the customer. As a matter of importance, any business that provides B2B digital services should consider where its customers have an FE with sufficient substance to receive the services supplied.


  • If a foreign company has a fixed or permanent establishment for VAT/GST purposes in your country, is it effectively treated as a domestic VAT/GST payer (e.g., with regard to VAT/GST registration, VAT/GST compliance, VAT/GST refunds)?
    EY - VAT/GST means full obligation in 46 of 67 countries

    In 46 countries surveyed, if a foreign company has an FE for VAT/GST, it is effectively treated as a resident VAT/GST payer.

    Generally, if a foreign business is found to have an FE in a country, it is responsible for registering for VAT/GST and accounting for the tax in the country where it is established (effectively, as a resident business). Where an FE exists, the supplier’s customers are not generally obliged (or permitted) to self-assess for VAT/GST. Failure to register for VAT/GST may result in severe financial penalties, even when there has been no effective tax loss because the customer has accounted for tax under a “reverse charge” (self-assessment) mechanism.

    A foreign business with an FE must meet all related VAT/GST compliance obligations, such as invoicing, keeping appropriate books and records, submitting VAT/GST returns, making VAT/GST payments, and submitting any supplementary information that the tax administration may require. On the other hand, once a foreign business has an FE, it is generally permitted to recover VAT/GST on costs and overhead in the same way as all other resident businesses. In countries that do not refund VAT/GST paid by nonresidents, VAT/GST recovery can be an important benefit of achieving FE status.

  • Can a foreign company be required to register for VAT/GST in your country if it does not have a fixed or permanent establishment for VAT/GST purposes?
    EY - VAT/GST obligations for nonresidents in 46 of 67 countries

    The FE concept is not as decisive for determining tax chargeability for indirect taxes as the concept of PE is for direct taxes. In many cases, the charge to VAT/GST depends on criteria other than whether the supplier has an establishment (such as the location of goods when they were sold). In some cases, if VAT/GST applies, the nonresident’s tax obligation may be fulfilled through obligations on the resident customer.

    Increasingly, a nonresident supplier may be liable to register for VAT/GST in a country where it has no FE, generally for supplies of goods and services to private consumers who are not taxable persons for VAT/GST purposes.

    In 46 countries surveyed, a nonresident may be required to register for VAT/GST purposes even if it has no FE.

    This aspect of the VAT/GST system represents a significant difference from how most other taxes operate in a cross-border context. In particular, it has far-reaching implications for remote sellers of goods and services, many of whom may be unaware of their obligations in countries where they have no physical presence.

    Further, the activities that create an obligation for a nonresident to register for VAT/GST differ among countries with no formal harmonization outside of the EU itself. Common activities that create an obligation to register for VAT/GST without an FE include:

    • Sales of goods (e.g., sales made by a group procurement company to a local distributor)
    • E-commerce sales of goods to EU consumers
    • Services related to immovable goods (e.g., repairs)
    • Supplies of digital services to end consumers (e.g., downloaded games, e-books and music)

    Some VAT/GST registration triggers for nonresidents

    • Australia

      A foreign company that supplies accounting or legal services to an Australian entity, which are performed in Australia, is making supplies that are “connected with the indirect tax zone” (as provided by Section 9-25(5)(a) of the GST Act). The foreign company is required to register for GST if the supplies “connected with the indirect tax zone” equal or exceed AU$75,000. The requirement for nonresidents to register for business-to-consumer (B2C) digital activity may also be expected to apply from 1 July 2017.

    • Canada

      A person who supplies taxable property or services in Canada to the extent that they demonstrate a significant presence in Canada (as determined by applying a number of indicators) will be considered to carry on business in Canada and will be required to register for GST/HST (harmonized sales tax) irrespective of whether they maintain a permanent establishment in Canada. In addition, nonresident persons who supply admissions to public speaking engagements, sports events, concerts, stage performances, seminars, and other activities and events are specifically required to register, whether or not they carry on a business in Canada or have a permanent establishment. In addition, vendors who solicit orders for publications to be delivered by mail or courier in Canada must register unless they are small suppliers.

    • Congo

      A nonresident must register when supplying services to a resident entity or when selling export goods to a resident.

    • Curacao

      A nonresident must register for B2C services provided by non-established businesses and considered to be enjoyed in Curacao.

    • Dominican Republic

      Registration is required if a foreign company carries out any of the following activities within the Dominican territory: sale of industrialized goods, importation of goods and provision of services. The VAT treatment applicable to the supply of digital services by a nonresident is not clear in local legislation.

    • European Union

      A nonresident company may be obliged to register for VAT purposes for a number of activities, including the supply of goods within the EU; intra-Community acquisitions or intra-Community supplies; work on immovable goods; B2C distance sales of goods; the sale of tickets to events and exhibitions; B2C supplies of digital services; and services in connection with immovable property supplied to non-business customers.

    • India

      Registration may be required, for instance, for goods imported into the country for sale and related services through an agent in India.

    • Japan

      Registration may apply for the B2C supply of digital services to Japanese customers.

    • Kenya

      Registration may be required for taxable supplies made within Kenya, such as the supervision of a project within the country.

    • New Zealand

      GST registration will be required by nonresidents if supplies are made in New Zealand to individuals who are not registered for GST, or to business customers that make exempt supplies. In addition, the supply of remote services (such as software, music or other content over the internet) made by nonresidents will likely be deemed to be made in New Zealand. This rule is expected to take effect 1 October 2016.

    • Peru

      Foreign companies involved in importing goods may have to register an FE or corporation within Peru to deal with any importation declarations and formalities. A foreign company selling movable goods or assets located within the country may also be obliged to register; however, this scenario is not specifically regulated.

    • Philippines

      Withholding VAT applies when payments are made to nonresidents for services rendered in the Philippines, or the lease or use of properties or rights in the Philippines (i.e., the nonresident is the lessor or payee of the rental or royalties). Singapore: a nonresident may be required to register for VAT if goods that belong to the foreign company are located in Singapore and are supplied locally or are exported from Singapore to another country.

    • South Africa

      A foreign company could have a registration liability if it has a contractual obligation to supply goods or services in South Africa. VAT registration is also required for the supply of electronic services made by a person from a place in an export country, where at least two of the following circumstances are present: (i) the recipient of those electronic services is a resident of the republic; (ii) any payment to that person originates from a South African bank account; (iii) the recipient of those electronic services has a business address, residential address or postal address in the Republic. A person becomes liable to be registered at the end of the month when the total value of taxable supplies made by that person has exceeded R50,000. The supply of digital services in South Africa is taxed on B2B as well as B2C transactions.

    • South Korea

      Effective 1 July 2015, foreign B2C digital service providers are required to register for VAT in South Korea.

    • Switzerland

      A foreign company is liable to register for Swiss VAT if turnover from taxable supplies carried out in Switzerland exceeds CHF100,000 in one calendar.

    • Thailand

      A foreign company must register for Thai VAT if it carries on a VAT-able business in Thailand through its agent or representative in Thailand and its VAT-able revenue meets or exceeds the VAT registration threshold (currently THB1.8million, or approximately US$51,000 per year).

    • Uruguay

      A nonresident may be required to register for VAT, for example, when it provides services in the country and there is no withholding agent.

    Increasingly, the costs of complying with VAT/GST obligations in a foreign jurisdiction are likely to be a factor in evaluating business opportunities for nonresidents in the digital economy. Businesses that do not comply with their obligations risk incurring severe financial penalties, disrupting their business and damaging their reputation.

    However, many nonresident companies struggle to meet these obligations, and for some, doing so may present a significant barrier to doing business. Generally, if an overseas business is obliged to register for VAT/GST, it must account for the tax in the country and it must generally meet all the VAT/GST compliance obligations in that country (e.g., invoicing, keeping appropriate books and records, submitting VAT/GST returns, making VAT/GST payments and submitting supplementary information).

    Nonresidents may face additional requirements that differ from those imposed on residents. These obligations are generally not harmonized and may vary by country. For example, in many countries, a nonresident must appoint a resident fiscal representative to act on its behalf, or it may be required to set up a local bank account or bank guarantee.

    In some jurisdictions, such as the EU and South Korea, simplified VAT/GST returns may be available for nonresidents (e.g., the EU Mini One Stop Shop for remote sellers), but other restrictions may apply to businesses that use the simplified scheme (such as restrictions on VAT recovery).

  • If a foreign company has a fixed or permanent establishment for VAT/GST purposes in your country, does it automatically have a permanent establishment for direct tax purposes?
    EY - 32 of 67 countries, having an FE for VAT/GST may be influential in determining PE status for direct taxes

    In defining an FE for VAT/GST purposes, most countries apply different criteria from those used to define a PE for direct tax purposes (see Question 3). In 41 countries surveyed, the existence of an FE for VAT/GST does not mean that a foreign business automatically has a PE for direct tax purposes. However, in 17 countries surveyed, the tax administration does automatically link FE and PE (Algeria, Argentina, Egypt, Estonia, Greece, Indonesia, Jamaica, Kenya, Malawi, Mauritius, Peru, Slovak Republic, South Korea, Switzerland, Turkey, Uruguay and Zambia).

    In an additional 15 countries, the existence of an FE for VAT/GST is influential in determining PE status (Bulgaria, Congo, Croatia, Cyprus, Czech Republic, Hungary, India, Luxembourg, Malta, Portugal, Romania, Singapore, Spain, Sweden and the United Kingdom). The link between FE and PE is particularly strong in the EU.

  • If a foreign company has a permanent establishment for direct tax purposes in your country, does it automatically have a fixed establishment for VAT purposes?
    EY - 43 of 67 countries, having a VAT/GST registration may be influential in determining PE status for direct taxes

    In most countries surveyed, the existence of a PE for direct tax purposes does not automatically confer FE status, although this link is automatic in 20 countries (Algeria, Angola, Argentina, Australia, Chile, Croatia, Curacao, Egypt, India, Indonesia, Jamaica, Kenya, Malawi, Mauritius, Peru, Portugal, South Korea, Switzerland, Turkey and Uruguay).

    And the existence of a PE is considered influential in deciding FE status in 23 other countries (Armenia, Austria, Brazil, Bulgaria, Congo, Cyprus, Czech Republic, Dominican Republic, France, Hungary, Kazakhstan, Latvia, Malta, New Zealand, Poland, Romania, Russia, Singapore, Slovenia, South Africa, Spain, Sweden and Zambia). These responses indicate that the presumption of FE status is stronger if a taxpayer already has a PE.

  • Can a foreign company have a fixed or permanent establishment for VAT purposes in your country for receiving supplies of goods or services?
    EY - 31 of 67 countries, having a VAT/GST registration may be influential in determining PE status for direct taxes

    In recent years, the concept of an FE to receive supplies for VAT/GST purposes has been developing within international VAT/GST legislation and CJEU case law. It is directly linked to the increase in cross-border intra-company activity and to the spread of e-services — where the concept is being used, in particular, to distinguish the liability to tax and place of supply for cross-border services supplied B2C and B2B. This is sometimes called a “passive” FE.

    Thirty-one of 67 countries responded that a business may have a VAT/GST FE for receiving supplies (Austria, Belgium, Brazil, Canada, Chile, Croatia, Cyprus, Czech Republic, Finland, France, Greece, Hungary, Indonesia, Ireland, Italy, Jamaica, Kenya, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Singapore, Slovak Republic, Slovenia, Spain, Sweden and the UK).

    One country (Australia) indicated that this status may be possible. Because this is still a developing concept, the practical consequences and potential risks of having a passive FE are not clearly defined in many countries. The general assumption is that the “passive” FE is likely to trigger the same rights and obligations as an “active” FE — to register for VAT/GST, to account for VAT/GST (e.g., on reverse-charge services), to submit all VAT/GST declarations and reports, and to recover input tax.


1 Article 11, EU Regulation 282/2011.

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