Dear readers,
We want to inform you about a recent judgment of the Court of Justice of the European Union (C-232/22) that again dealt with formation of a permanent establishment for the VAT purposes.
The Court of Justice of the EU concluded in the above-mentioned judgment that in a case where a contracting party (a recipient) receives services on the basis of an exclusive service agreement in a state other than the one where that party’s place of business operation is located, resources of the performance’s provider cannot be considered the recipient’s resources. For this reason, no permanent establishment of the recipient is formed in such case.
What Was the Judgment About?
The Swiss corporation Cabot Switzerland GmbH as a taxable person registered outside the EU (a VAT payer in Belgium) entered into an exclusive processing contract with the Belgian corporation Cabot Plastics (both corporations are members of the same Group and are financially interconnected with each other). Based on that processing contract:
Outcomes of Tax Inspection and Reasoning of the Belgian Tax Administration
In connection with a tax inspection, the Belgian Tax Administration arrived at a conclusion that a permanent establishment of Cabot Switzerland GmbH was formed in Belgium. The tax inspection resulted in additionally assessed VAT on services provided by Cabot Plastics, in which the place of supply was identified to be in Belgium due to the permanent establishment’s formation.
The Belgian Tax Administration referred to the exclusive use of human and technological resources of Cabot Plastics, as well as to the corporation’s structure (that enables accepting and using products for the purpose of performing the corporation’s own deliveries of goods) and the establishment’s permanency.
Cabot Switzerland GmbH filed an action against that decision, and the whole case was submitted to the Court of Justice of the EU (CJEU).
CJEU’s Statement
In the CJEU’s opinion, the key criterion in determining the place of supply is the place of business operation, which constitutes an objective criterion in determining the place of supply. Exceptions from this principal include taxation in the place of the permanent establishment’s formation. In the CJEU’s view, this exception only applies in a case where the basic rule’s application (taxation in the place of business operation) is irrational and double (non)taxation might occur.
According to the CJEU, the permanent establishment must have a sufficiently constant structure of human and technical resources in an EU member state where taxable supply occurs; at the same time, the permanent establishment must be able to accept and use supplies for its business operation.
The CJEU concluded in the judgment that Cabot Plastics in the position of a human and technical resources’ provider remained responsible therefor and rendered those services at their own risk. Even though the service agreement is an exclusive one, it does not result in the provider’s resources becoming the recipient’s resources. In the CJEU’s view, the same resources cannot be used on both sides of the transaction. Hence, the CJEU arrived at a conclusion that a permanent establishment of Cabot Switzerland GmbH in Belgium for the VAT purposes was not formed and the basic criterion for determining the place of supply (i.e. Switzerland in this particular case) shall be applied to the specified transaction.
Stela Bartošová Michaela Kozminská
bartosova@edmutilitas.cz kozminska@edmutilitas.cz