Court of Justice delivers judgment in long-awaited case on fixed establishment with affiliated company

The case revolves around a reassessment against Cabot Plastic SA BELGIUM (referred to as "CPB (BE)") for an amount of no less than 10 million EUR in VAT, 1 million EUR in fines, and late payment interest starting from January 21, 2017.

From a VAT perspective, CPB's business model did not appear particularly spectacular. CPB invoiced services under the B2B rule (mainly contract manufacturing) to an affiliated Swiss company, Cabot Plastic Switzerland GmbH (hereinafter "CSG (CH)"), without charging VAT.

Legally, CPB (BE) and CSG (CH) are separate entities, but they have a financial connection as both are owned by the same holding company, making them sister companies.

In practice, CSG (CH) purchased raw materials and had them processed by CPB (BE). These raw materials remained the property of CSG (CH) and were stored in CPB (BE)'s premises. CSG (CH) then sold the finished products in Belgium and abroad. For VAT purposes, CSG (CH) appointed a representative in Belgium.

CPB (BE) was involved not only in the manufacturing of goods but also in providing logistics services for CSG (CH)'s sales, such as storage, packaging, truck loading, and other related tasks.

The services provided by CPB (BE) to CSG (CH) constituted almost the entirety of CPB (BE)'s revenue, indicating a certain level of exclusivity.

CSG (CH) had obtained a ruling confirming that it did not have a fixed establishment for direct tax purposes in Belgium. However, this ruling did not address VAT matters.

Following an audit in 2017, the tax authorities determined that CSG (CH) did, in fact, have a fixed establishment in Belgium according to VAT legislation. Consequently, the services provided by CPB (BE) were considered to have been rendered to the Belgian fixed establishment (of which none of the parties involved were aware at the time). As a result, a significant additional tax assessment was imposed, as the tax authorities argued that the "place of supply" in such cases should be where the customer is located, specifically referring to CSG (CH)'s fixed establishment in Belgium. The additional assessment covered the years 2014, 2015, and 2016.

Tax authorities' arguments

The tax authorities presented the following arguments to support their claim that CSG (CH) had a fixed establishment in Belgium and that the services provided by CPB (BE) to CSG (CH) should be subject to taxation in Belgium:

• Exclusivity: The agreement between CPB (BE) and CSG (CH), in which CPB (BE) committed to using its facilities and personnel exclusively for the production of products for CSG (CH), was cited as evidence of the close connection between the two entities.

• Technical resources: Although the technical resources, such as factories, distribution centers, and storage facilities, were owned by CPB (BE), they were deemed to have been made available to CSG (CH) under the agreement by the Belgian authorties. The provision of infrastructure and resources, rather than ownership, was considered a criterion for the existence of a fixed establishment by the Belgian tax authorities.

• Human resources: the personnel of CPB (BE) performed essential services for CSG (CH), including receiving raw materials, quality control, order preparation, product packaging, inventory management, and truck reception. This personnel, along with the aforementioned technical resources, were permanently at the disposal of CSG (CH) as part of the contractual agreement.

• Structure: The structure provided by CPB (BE) allowed CSG (CH) to actually use the services and products received for its own deliveries of goods in Belgium. The services provided by CPB (BE), such as contract manufacturing and logistical support, were exclusively performed for the benefit of sales taking place in Belgium, i.e., for the benefit of CSG's fixed establishment in Belgium, rather than for the main seat of economic activity in Switzerland.

• Duration of the agreement: The sufficient degree of permanence, according to the tax authorities, stemmed from the agreement concluded in 2012 between CPB (BE) and CSG (CH).

Based on these arguments, the authorities c oncluded that CSG should be deemed to have a fixed establishment in Belgium and that the services provided by CPB (BE) to CSG (CH) are taxable in Belgium. CPB (BE) appealed the judgment of the Court of First Instance, and the Court of Appeal decided to refer the matter to the European Court of Justice.

Preliminary questions

The following preliminary questions were raised:

1. In the case of a supply of services by a taxable person established in one Member State to another taxable person acting as such, whose business is established outside the European Union, where those persons are separate and legally independent entities but form part of the same group, where the service provider contractually undertakes to use its equipment and its staff exclusively for the production of products for the recipient of the services and where those products are then sold by that recipient, giving rise to taxable supplies of goods for which the service provider renders logistical assistance and which take place in the Member State in question; are Article 44 of Council Directive 2006/112/EC of 28 November 2006 1 and Article 11 of Council Implementing Regulation (EU) No 282/[2011] of 15 March 2011 2 to be interpreted as meaning that the taxable person established outside the European Union must be deemed to have a fixed establishment in that Member State?

2. Are Article 44 of Directive 2006/112/EC and Article 11 of Council Implementing Regulation (EU) No 282/[2011] of 15 March 2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax to be interpreted as meaning that a taxable person may have a fixed establishment where the required human and technical resources are those of its service provider, which is legally independent but forms part of the same group, and which contractually undertakes to use them exclusively for the benefit of that taxable person?

3. Are Article 44 of Directive 2006/112/EC and Article 11 of Council Implementing Regulation (EU) No 282/[2011] of 15 March 2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax to be interpreted as meaning that a taxable person has a fixed establishment in the Member State of its service provider if the latter supplies it, pursuant to an exclusive contractual undertaking, with a series of services which are ancillary or additional to tolling in the strict sense, thus contributing to the completion of sales concluded by that taxable person from its place of business outside the European Union but giving rise to taxable supplies of goods which, under the VAT legislation, take place in the territory of that Member State?

In simple terms, it needs to be examined whether, under the given circumstances, CSG should be considered established for VAT purposes in Belgium, and whether the services provided by CPB to CSG are therefore taxable in Belgium.

Comments

The Court of Justice now arrives at the (in our opinion: nothing more than logical) conclusion that, in this case, there cannot be a fixed establishment for VAT purposes.

In reaching this conclusion, the Court refers back to its previous jurisprudence. First and foremost, it recalls that the most useful - and therefore the primary - criterion for determining the place of service for tax purposes is the location where the taxable person has established the seat of their business. The consideration of another establishment becomes relevant only if the seat does not lead to a rational solution or gives rise to a conflict with another member state.

The determination of whether there is a fixed establishment as a recipient of services should be made from the perspective of the service recipient, not the service provider.

A fixed establishment cannot exist without a clear structure manifested by the presence of personnel or technical resources. Furthermore, this structure cannot be merely temporary.

While a taxable person is not required to have their own personnel and technical resources to be considered as having a structure in another member state that is sufficiently permanent and suitable, they must have the ability to use such personnel and resources as if they were their own. This can be achieved, for instance, through service agreements or lease agreements.

The existence of a subsidiary in a member state by a company established in another member state does not automatically imply the presence of a fixed establishment.

A legal entity is deemed to use the technical resources and personnel at its disposal for its own needs, even if it has only one customer.

The Court determines that in this case, CPB (BE) remains responsible for its own resources. Additionally, a clear distinction must be made between the services provided by CPB (BE) - the contract work and ancillary services - and the sales made by CSG (CH). Furthermore, no differentiation can be made between the resources used by CPB (BE) for service provision and those that would be used by CSG (CH) for receiving the services. As a result, there simply cannot be a fixed establishment of CSG (CH) in Belgium.

The additional services performed by CPB (BE) for CSG (CH) do not affect this conclusion. In other words, the fact that CPB (BE) manages the inventory of goods for CSG (CH) does not give rise to a fixed establishment in Belgium.

What now?

It is striking how the Belgian tax authorities have pushed forward in this case. There were already several precedents indicating that there could be no fixed establishment in this case. For instance, in response to a parliamentary question in 2021, the Minister of Finance explicitly stated that the fact that a Belgian service provider exclusively offers its services to a foreign recipient is not relevant (Question No. 272, dated 01.03.2021). Furthermore, the Court of Justice had already established that the technical resources and personnel of a service provider (in this case: CPB (BE)) cannot be used simultaneously to provide services and receive services (CJEU, 7 April 2022, C-333/20, Berlin Chemie).

From the outset, it seemed clear to us that it would be an impossible task for the tax authorities to win this case. However, the court of first instance in Liège delivered an (unmotivated) ruling in favor of the tax authorities, and no one within the government seemed to be concerned that a company was being assessed for several million euros without a solid legal basis. It raises some questions...