An In-Depth Explanation of the Fixed Establishment Concept By Alexis - - PowerPoint PPT Presentation

An In-Depth Explanation of the Fixed Establishment Concept

By Alexis Tsielepis Managing Director, Chelco VAT Ltd

Monday, 8 May 2017, St. Raphael Resort, Limassol Wednesday, 10 May 2017, Cleopatra Hotel, Nicosia Cyprus Fiduciary Association #CFAseminars2017

A LITTLE BACKGROUND

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The legislation – FE

• First mentioned as a concept in the Sixth Directive

(1 Jan 1979 – 31 Dec 2006) – not defined

• Continued to be mentioned in Council Directive

2006/112/EC of 28 November 2006 “The VAT Directive” (from 1 Jan 2007) – again not defined

• ECJ guidance provided in various cases

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The legislation – FE

• First defined in Council Implementing Regulation (EU)
• No. 282/2011 of 15 March 2011 laying down

implementing measures for the VAT Directive

• Implementing Regulation has direct effect in all Member

States

• Followed the definition laid down by ECJ but did not

include the important factor of ‘rational test’

Fixed Establishment

As per the legislation and ECJ jurisprudence

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Fixed Establishment: ECJ: Foundations

• Foundations laid down in 1985 in Berkholz (C-168/84,

4.7.1985)

• Berkholz installed and maintained gaming machines on

board ferryboats travelling between Germany and Denmark.

• Maintenance was done by Berkholz’s employees on site

but Berkholz did not maintain permanent staff on the ferryboat.

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Fixed Establishment: ECJ: Foundations

• The German tax authorities applied VAT to the entire

turnover from the gaming machines deeming it to have arisen in Berkholz’s place of business in Germany.

• Berkholz, on the other hand, argued that the machines

constituted an FE and thus a percentage of their income was outside the scope of VAT.

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Fixed Establishment: ECJ: Foundations

• Berkholz (C-168/84, 4.7.1985)
• “for an FE to exist, there should be a certain minimum size and

that both the human and technical resources necessary for the provision of the services should be permanently present”

• They thus concluded that the installation on board a sea-

going ship of gaming machines, maintained intermittently, was not capable of constituting an FE.

• ECJ never rejected in Berkholz the notion that an FE

could not be found on a ship – therefore a ‘moving’ FE is possible.

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Fixed Establishment: ECJ: Foundations

• Berkholz definition of FE confirmed in Faaborg-Gelting

Linien (C-231/94, 4.5.1996)

• Faaborg-Gelting Linien (hereinafter “FG Linien”),

established in Denmark, supplied meals for consumption

• n board ferries running between the ports of Faaborg

(Denmark) and Gelting (Germany).

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Fixed Establishment: ECJ: Foundations

• FG Linien considered the supply to be a supply of a

service, taxable where the supplier was established. As such, it did not declare these in its German VAT declaration.

• The German VAT authorities, on the other hand,

regarded the supply to be one of goods, with the place of supply to be where the goods are at the time the supply takes place, and thus levying German VAT on the supplies that took place within the German VAT geographical scope

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Fixed Establishment: ECJ: Foundations

• The ECJ firstly concluded that restaurant services

constituted a supply of services and not a supply of goods.

• ECJ then referred to Berkholz pointing out that such a

supply takes place where the supplier has established his business, unless there was an FE, with a certain minimum size and both human and technical resources, necessary for the provision of the service, were permanently present.

• ECJ concluded that such an FE for FG Linien, could not

exist on board the ferries.

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Fixed Establishment: ECJ: Foundations

• In arriving at this conclusion, the ECJ noted that the

business establishment of the operator of the ship afforded an appropriate point of reference for the purposes of taxation.

• ECJ stated that in examining which establishment was

appropriate, a rational result for tax purposes should arise, that does not conflict with another Member State.

• ‘Rational outcome’ was not explained and is very

subjective: every tax authority issuing assessments believes that in doing so a rational result for tax purposes arises!

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Fixed Establishment: ECJ: Foundations

• Definition expanded 12 years after Berkholz in ARO

Lease (C-190/95, 17.7.1997)

• ARO Lease BV established in Netherlands
• It leased around 6,000 passenger cars in the Netherlands

and around 800 in Belgium.

• The agreements were drawn up in the ARO’s offices in

the Netherlands.

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Fixed Establishment: ECJ: Foundations

• In Belgium, ARO worked through self-employed

commission agents.

• Belgian customers (corporate and individuals) chose a car from a

dealer,

• ARO purchases the car from the dealer and leases it to the

customer, typically on a long-term basis,

• ARO insures the cars against repairs and assistance in case of

damage.

• ARO did not maintain an office in Belgium, but kept the

fleet of cars stored in dealerships, where these were not leased out.

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Fixed Establishment: ECJ: Foundations

• The Belgium VAT authorities considered that ARO

maintained an FE in Belgium, through its fleet of cars, wanting to assess the Belgium car leasing activities to

• VAT. ARO was paying VAT in the Netherlands.

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Fixed Establishment: ECJ: Foundations

• The ECJ referred to Berkholz, stating that for an FE to

exist, a minimum degree of stability derived from the permanent presence of both the human and technical resources necessary for the provision of the services was required.

• It ruled that ARO did not have an FE in Belgium as it

possessed in Belgium neither its own staff, nor a structure with a sufficient degree of permanence to provide a framework in which agreements could be drawn up or management decisions taken, thus enabling the services to be supplied on an independent basis.

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Fixed Establishment: ECJ: Foundations

• The ECJ also noted that ancillary factors, such as the

Belgium customers choosing their own cars from Belgium dealers, had no bearing on the place of establishment of the supplier of the service.

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Fixed Establishment: ECJ: Foundations

• The same conclusion arose in Lease Plan Luxembourg

(C-390/96), which was based on very similar facts.

• The ECJ firstly pointed out that the place where the

supplier had established his business was the primary point of reference to determine the place of supply, unless this “does not lead to a rational result for tax purposes or creates a conflict with another Member State”.

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Fixed Establishment: ECJ: Foundations

• The ECJ further explained that reference to an

establishment other than the main place of business would only be possible if that establishment, meaning an FE, possessed a sufficient degree of permanence and a structure adequate, in terms of human and technical resources, to supply the services in question on an independent basis, which Lease Plan did not possess in Belgium.

• The ECJ also concluded that the mere registration of

vehicles in a Member State was not an indication of an FE in that Member State.

Fixed Establishment

Definition as per the Implementing Regulation

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Definition as per Implementing Regulation (Article 11)

• the FE requires that it:

I. has permanence; and II. has human resources; and

• III. has technical resources; and
• IV. either receives and uses services (the receiving FE); and / or

V. supplies services (the supplying FE).

• (i) referred to as the objective requirement
• (ii) and (iii) referred to as the subjective elements
• (iv) and (v) referred to as the functional elements

Fixed Establishment

Analysis of the Definition as per the Implementing Regulation

Fixed Establishment

“Permanence”

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Fixed Establishment: Permanence

• The ECJ has not interpreted the term ‘permanence’
• ‘sufficient degree of permanence’ should be viewed

mainly as permanence in terms of time.

• Examining permanence in terms of geography may not

be a suitable test when applied to a consumption tax, given that a geographically movable FE is possible (Berkholz and Faaborg-Gelting Linien where a ferry boat could constitute an FE)

• The time period should not be attached to the FE itself

per se, but more to the activities that the FE actually undertakes.

Fixed Establishment

“Human and Technical Resources”

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Supplying FE: Human and Technical Resources

• In Berkholz, the fundamental conclusion of the ECJ was

that in order to have an FE, human resources (i.e. personnel) are required: the gaming machines did not constitute an FE. Here, arguably Berkholz did have technical resources, being the machines themselves, but no permanent human resources.

• The court looks at the activities of the business and then

analyses what technical and human resources these activities would require.

• From there, the examination is to locate the establishment,

where the resources used, is found.

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Supplying FE: Human and Technical Resources

• In ARO Lease, the court noted:
• leasing of vehicles consists principally in negotiating, drawing up,

signing and administering the relevant agreements,

• and then in making the vehicles concerned, which remain the

property of the leasing company, physically available to customers.

• The court ruled that in Belgium, ARO had neither the

necessary human resources, nor a structure with a sufficient degree of permanence through which such agreements could be concluded.

• Ancillary factors, such as the Belgium customers choosing

their own cars from Belgium dealers, had no bearing.

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Supplying FE: Human and Technical Resources

• In Planzer (C-73/06, 28.6.2007), the court examined the

same matter for transport activities:

• looked for at least an office in which contracts may be drawn up and

daily management decisions taken,

• and a place where the vehicles used for the said activities are stored
• ECJ also stated that a fixed installation used for

preparatory and auxiliary activities, such as recruitment

• f staff, or purchase of the technical means needed for

carrying out the undertaking’s tasks, did not constitute an FE

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Receiving FE: Human and Technical Resources

• Discussion for supplying FE also applies to receiving FE
• The receiving FE only needs to be able to use the service

received, and not actually use it, for the FE to exist.

• Therefore:

– representative offices, or – registered offices, or – branches

that do not make taxable supplies, can all constitute receiving FEs when acquiring services for their own needs

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Receiving FE: Human and Technical Resources

• The question should not be whether the taxable person

actually owns its human or technical resources.

• The questions should centre on the level of control that

the taxable person exerts over them.

• In the case that the taxable person outsources technical

and/or human resources, these could be deemed to belong to him, and thus constitute an FE, where he exerts such control and influence over them, that in the end they are considered as own.

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FE: Third Party Human and Technical Resources

• In the early cases of ARO Lease and Lease Plan, the ECJ

rejected the presence of an FE given that the leasing company did not possess its own staff or its own structure

• In DFDS (C-260/95, 20.2.1997), the human and technical

resources of a dependent subsidiary, were attributed to the parent company in establishing the existence of an FE

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FE: Third Party Human and Technical Resources

• DFDS (C-260/95, 20.2.1997)
• DFDS A/S was a Danish company in the business of

selling package tours. Its UK subsidiary, DFDS Ltd, sold such packages in the UK on its behalf, as an agent. The UK subsidiary had the authority to act as a central booking office for the UK and Ireland for all the passenger services of its Danish parent company.

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FE: Third Party Human and Technical Resources

• The UK VAT authorities considered that DFDS A/S was a

travel agent, selling its packages to the UK travellers through an FE, being its UK subsidiary.

• DFDS A/S considered that the services were taxable

where it had established its business, being Denmark, a country which had exempted such services in its national legislation.

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FE: Third Party Human and Technical Resources

• The ECJ ruled that it was possible for a subsidiary in one

Member State, to be considered an FE of its parent, in another Members State, if:

• the subsidiary could constitute an organization with the human

and technical resources necessary for the provision of the services, and

• The subsidiary was not independent from its parent.
• There is once again a possibility that the ECJ was

influenced by the conclusion of what it should have found if it concluded otherwise.

• Conclusion: DFDS not capable of wider application.

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FE: Third Party Human and Technical Resources

• The prerequisite of an FE, of having own human and

technical resources seems to be withering. The ECJ is showing signs of broadening the FE concept to cover situations where the taxable person uses resources of third parties, in undertaking activities in MS where it has no establishment of its own (conclusion derived from Welmory (C-605/12, 16.10.2014))

Fixed Establishment

“Rational Test”

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Fixed Establishment: ECJ: Rational test

• Rational test is an underlying principal arising from ECJ,

not found in definition of Implementing Regulation

• The ECJ has continuously ruled that if that place of the

established business did not lead to a rational result, or if it created a conflict with another Member State, then, and only then, should another establishment come under consideration (Berkholz, Faaborg-Gelting Linien, ARO Lease, Welmory)

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Fixed Establishment: ECJ: Rational test (continued)

• Primary point of reference, is, as per the ECJ, objective,

simple and practical, and easier to verify than the existence of an FE.

• In reality, it was included as a requirement by ECJ to

clamp down on VAT avoidance schemes

• Let’s compare Berkholz to RAL (C-452/03, 12.5.2005)

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Fixed Establishment: ECJ: Rational test (continued)

• RAL (C-452/03, 12.5.2005)
• Initially RAL alone operated slot gaming machines though

property that it owned or leased, owning also the machines, employing its own staff and holding all necessary gaming licenses.

• A restructuring then took place. Operations were

transferred to a Channel Islands holding (“CI”). RAL continued to own and lease the premises and hold licenses for operating arcades.

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Fixed Establishment: ECJ: Rational test (continued)

• It sub-licensed to CI to install and operate slot gaming

machines on those premises. The slot gaming machines themselves were owned by another group company which also owned their licenses and which leased these to CI but remained responsible for keeping them in good repair.

• CI then subcontracted the day-to-day management of

the machines to yet another group company which employed all of the 600 RAL staff. CI had no employees.

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Fixed Establishment: ECJ: Rational test (continued)

• CI claimed that the gaming machine services were

supplied from Guernsey, and therefore no VAT was due, but allowing full right of deduction.

• The UK VAT authorities supported the view that the

restructuring was a VAT avoidance scheme and should be disregarded.

• The ECJ did not examine the FE. It concluded instead that

the gaming services constituted ‘entertainment activities’, whose place of supply was where those services were physically carried out.

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Fixed Establishment: ECJ: Rational test (continued)

• In Berkholz, the rational result, as per the ECJ, was that the

place of supply followed the then basic place of supply rule, which was where the supplier was established.

• In RAL, the rational result was that the services constituted

entertainment services.

• The comparison of the two cases highlights that the ‘rational

result’ test is clearly subjective, to be based on the facts and merits of each case, but that this in turn creates uncertainty

Fixed Establishment

“Association with Head Office”

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Fixed Establishment: Association with head-office

• In FCE Bank (C-210/04, 23.3.2006) ECJ ruled that the

Italian branch of the UK head-office was not an independent taxable person

• branch did not bear the economic risk arising from its business
• Branch had no endowment capital, which meant that if a

customer defaulted on a loan, the risk was borne entirely by the UK Bank and not the Italian branch

• No supply could exist for VAT purposes between the

head-office and the branch

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Fixed Establishment: Association with head-office

• FCE bank principal does not apply where FE is part of a

VAT group in that country (Skandia, C-7/13, 17.9.2014)

• The services supplied by the Skandia group’s Canadian

head-office to its Swedish branch must be considered as not having been supplied to the branch itself, but rather to the VAT group as a whole, which was a separate taxable person

Fixed Establishment

Where the FE Appears in the VAT Directive

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The FE in the VAT Directive

• The VAT Directive mentions the FE in several articles,

without however defining it and can be broadly categorised under four categories:

– The FE as a recipient of services, in determining the place of supply; – The FE as a supplier of services, in determining the place of supply; – The FE in determining the obligation to pay; – The FE with regards to invoicing requirements.

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The FE in determining the place of supply

• Article 44
• The place of supply of services to a taxable person acting as

such shall be the place where that person has established his

• business. However, if those services are provided to a fixed

establishment of the taxable person located in a place other than the place where he has established his business, the place of supply of those services shall be the place where that fixed establishment is located. In the absence of such place of establishment or fixed establishment, the place of supply of services shall be the place where the taxable person who receives such services has his permanent address or usually resides.

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The FE in determining the place of supply

• Article 45
• The place of supply of services to a non-taxable person shall

be the place where the supplier has established his business. However, if those services are provided from a fixed establishment of the supplier located in a place other than the place where he has established his business, the place of supply of those services shall be the place where that fixed establishment is located. In the absence of such place of establishment or fixed establishment, the place of supply of services shall be the place where the supplier has his permanent address or usually resides.

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Fixed Establishment: ECJ: primary point of reference

• In Welmory, ECJ observed layout of the wording in Articles 44

and 45.

• The place of the established business is mentioned in the first

sentence of both articles and therefore constitutes the general rule.

• The FE is mentioned in the sentence that follows, and is

introduced by the adverb ‘however’, and could only therefore be understood as creating an exception to the general rule.

• As per established case law, the terms used to specify

exceptions are always to be interpreted strictly by the ECJ

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The FE in determining the place of supply

• Articles 44 and 45 of the VAT Directive, make specific

reference to four types of establishments:

• the place of establishment of the business – this is the

primary point of reference;

• the FE – this is the primary exception;
• the place of permanent address – this is the secondary

exception, together with the place of usual residence;

• the place of usual residence – this is the secondary

exception, together with the place of permanent address.

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The FE in determining the place of supply

• Article 38 – place of supply of gas, electricity, heat or

cooling energy

• Where the taxable dealer has an FE for which the goods are

supplied, the place of supply is where the FE is located.

• Article 56(2) – place of supply of B2C long-term hiring of

means of transport

• normally where customer is established
• changed to where the pleasure boat is placed at the disposal of

the customer, in cases where the service is actually provided by the supplier from his place of business or an FE situated in that place

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The FE in determining the place of supply

• Article 307 – place of supply of TOMS
• single service supplied taxable in MS where the travel agent has

established his business, or has an FE, from which the travel agent has carried out the supply

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The FE in the obligation to pay – 192a

• Article 192a provides that where a supplier has an FE

within the territory of the Member State where the tax is normally due through the reverse charge mechanism by the customer, the FE shall be ignored where the FE does not intervene in that supply.

• The FE is not deemed to intervene unless the technical

and human resources of the FE are used by the taxable person for transactions inherent in the fulfilment of the taxable supply of those goods or services made within the Member State, before or during this fulfilment. (A53 I/R 282/01)

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The FE in the obligation to pay – 192a (Continued)

• It must nevertheless meet the FE definition, i.e. possess a

sufficient degree of permanence, and a suitable structure adequate in human and technical resources, to be able to supply the service independently.

• As such, the ‘receiving FE’ cannot come under the scope
• f Article 192a.

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The FE in the obligation to pay – 192a (Continued)

• FE is ignored, even if it does intervene, where the VAT is

due in a Member State where the taxable person has established his place of business (A54 I/R 282/01)

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The FE in the obligation to pay – 192a (Continued)

• Where resources of the FE are only used for

administrative support tasks, such as accounting, invoicing and collection of debt-claims, they should not be regarded as being used for the fulfilment of the supply of goods or services (A53(2) I/R 282/01)

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The FE in the obligation to pay – 192a (Continued)

• Existence of a VAT identification number of an FE is not

sufficient in itself to consider that the taxable person has an FE (A11(3) I/R 282/01).

• However, where the FE’s VAT number is identified for the

purposes of issuing an invoice, it is deemed to intervene in the supply of goods or services, unless there is proof to the contrary (A53(2) I/R 282/01).

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The FE in invoicing requirements

• Article 219a(1) requires that invoicing be subject to the

rules applying in the MS in which the supply of the goods

• r services is deemed to be made.
• Article 219a(2) changes the rule to the MS where the

supplier has established his business, if this is in a different MS, or where he has an FE in a different MS from which the supply is made, and the customer has to apply the reverse charge, unless the FE does not intervene.

Thank you for attending!

Alexis Tsielepis

a.tsielepis@chelcoVAT.com