Can a fixed establishment of a company be created through the use of its subsiduary’s resources?

Background situation

Berlin Chemie AG is a company that has its registered office in Germany which has marketed pharmaceutical products in Romania. It also has a tax representative in Romania and is registered for VAT there.

Berlin Chemie also has a subsidiary in Romania with whom the German company entered into a marketing, regulatory, advertising and representation services contract. Under this contract, the Romanian company undertook to promote actively the products of the German company in Romania through, inter alia, marketing activities.

The Romanian company has focused on legally qualified advisory services to deal with advertising, informational and promotional issues, in the name of and on behalf of the German company. The Romanian company also undertook to take all the regulatory actions necessary in order to ensure that the German company is authorised to distribute its products and promote them in Romania. These activities have been carried out in accordance with the strategies and budgets established by the German company.

Furthermore, the Romanian company has taken orders for pharmaceutical products from wholesale distributors in Romania and issued invoices to customers in the name and on behalf of the German company. However, it was not directly involved in the sale and supply of pharmaceutical products by the German company and did not enter into commitments with third parties in the name of that company.

Issue concerned

The Romanian company invoiced the services in question exclusive of VAT to the German company, taking the view that the place of supply of those services was in Germany.

However, following a tax audit, VAT was imposed on the respective services. The tax authority took the view that the services supplied by the Romanian company to the German company were rendered to a fixed establishment of the latter in Romania and therefore, the place of their supply was in Romania.

The reasoning was based on the circumstance that the German company had continuous access to technical resources owned by the Romanian company, such as computers, operating systems and motor vehicles, as well as to its human resources. These were, according to the tax authority, sufficient to carry out regular supplies of taxable goods or services and therefore constituted a fixed establishment for VAT purposes to the German company in Romania.

Conclusions of the Court of Justice of the EU

• CJEU judgments (e.g. C-605/12 „Welmory“) generally do not exclude constituting a fixed establishment of taxable person through the use of resources belonging to an idependent economic operator.
• For a fixed establishment to be constituted, it is however necessary that the taxable person has the right to dispose of those human and technical resources in the same way as if they were its own.
• CJEU remarked that given that a legal person (the Romanian company), even if it has only one customer, is assumed to use the technical and human resources at its disposal for its own needs. The German company could have a suitable structure with a sufficient degree of permanence in Romania, in terms of human and technical resources, 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.
• The human and technical resources which were made available to the German company by the Romanian company and which, according to the Romanian tax authorities, make it possible to establish the existence of a fixed establishment of the German company in Romania, are also those through which the Romanian company supplies the services to the German company. Yet, the same resources cannot be used both to provide and receive the same services.
• The respective services provided by the Romanian company seem to be received by the German company, which uses its human and technical resources situated in Germany to conclude and perform the contracts of sale with distributors of its pharmaceutical products in Romania.
• If the mentioned facts are established, the German company does not have a fixed establishment in Romania, since it does not have a structure in that Member State allowing it to receive services there provided by the Romanian company and to use those services for the purposes of its economic activity of selling and supplying pharmaceutical products.
• CJEU concluded that a company with 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.

The judgment brought further clarifications of the fixed establishment concept for VAT purposes. It may be helpful e.g. when setting up contractual relationships with independent economic operators whose activities, carried out through their own technical and human resources, have a direct influence on sales activities of a company seated abroad.

If you have any questions regarding assessment of existence of a fixed establishment, e.g. when entering new sales markets, we would be pleased to assist. You can find the judgment here.