There is no permanent establishment for VAT purposes in case one company uses its subsidiary to produce goods in a Member State of the European Union

Edited by Davide Accorsi and Laura Piranese

On June 29, 2023, in its judgment in Case C-232/22, Cabot Plastics Belgium SA, the Court of Justice of the European Union clarified that a taxable person who is the recipient of production services carried out by a subsidiary, which operates exclusively for the taxable person in question, does not have a fixed establishment in the EU Member State in which the subsidiary operates, unless it has the power to dispose of the human and technical means of the subsidiary as if they were its own.

The case concerns Cabot Switzerland GmbH (hereinafter also “Cabot Switzerland”), a company having its place of business in Switzerland, registered for VAT purposes in Belgium for the activity of selling carbon-based products.

Cabot Switzerland has entered into a tolling contract with Cabot Plastics Belgium SA (hereinafter also “Cabot Belgium”). The latter, although part of the same group, is legally independent from Cabot Switzerland.

In application of the aforementioned contract, Cabot Belgium, using its own means, stores raw materials purchased by Cabot Switzerland on its premises and then processes them into finished products on behalf of the latter. In addition, also in application of the aforementioned contract, Cabot Belgium provides a number of additional services to Cabot Switzerland, including the customs warehousing of products, the management of products stored in warehouses held by third parties and the sending of recommendations for the purpose of optimizing the production process.

The services provided by Cabot Belgium to Cabot Switzerland constitute almost all of its turnover.

Based on the reported facts, the Court was asked to interpret Article 44 of Directive 2006/112/EC (hereinafter also the “Directive”) and Article 11 of Implementing Regulation (EU) 282/2011 (hereinafter also the “Regulation”) in order to define whether “a taxable person receiving services, whose business is established outside the European Union, has a fixed establishment in the Member State in which the provider of the services concerned – which is legally independent from that recipient – is established, where the taxable person providing services provides to that taxable person receiving services, pursuant to an exclusive contractual undertaking, those services and a series of ancillary or additional services, contributing to the business of the taxable person receiving services in that Member State, and the human and technical resources of that possible fixed establishment belong to the service provider”.

Essentially, therefore, the Court, in order to assess the existence of a possible permanent establishment for VAT purposes, should consider the possible implications of the following points:

  1. the human and technical means possibly attributed to the permanent establishment for VAT purposes belong to the supplier of the services;
  2. the service provider and the service recipient are legally independent entities, but belong to the same group of companies;
  3. the service provider contractually undertakes to use its equipment and personnel exclusively for the services covered by the agreement with the recipient;
  4. whether any means available to the recipient in the provider’s country enable him to receive and use for his own needs the services covered by the aforementioned agreement; and
  5. the additional services described in this text contribute to the economic activity of the recipient, giving rise to taxable supplies of goods in the Member State where the fixed establishment, if any, would be located.

Analyzing the case, the European Union judges first recalled that the priority connecting point with regard to the place of supply of general services provided to a taxable person is the  place where that person has established its business, since it, as an objective, simple and practical criterion, offers great legal certainty.

On the other hand, any permanent establishment for VAT purposes of the taxable person operates as a connecting point for the provision of general services only in cases where the criterion of the place of business does not lead to a rational solution or creates a conflict with another Member State.

Furthermore, the Court clarifies that, in the present case, it must be considered whether, based on Article 44 of the Directive and Article 11 of the Regulation as interpreted by the Court of Justice of the European Union in particular in Case C-605/12, Welmory, and Case C-333/20, Berlin Chemie A. Menarini

[1], the taxable person to whom the services are supplied has, with a sufficient degree of permanence and adequacy, human and technical means in the Member State in which the services are carried out and, where appropriate, whether those means actually enable him to receive and use those services.

[1] See in particular paragraphs 58 and 59 of the Case C-605/12, Welmory, and paragraphs 30 and 31 of the Case C-333/20, Berlin Chemie A. Menarini.

Turning to the analysis of the first point listed above, the Court clarifies that “although it is not a requirement for a taxable person itself to own the human or technical resources in another Member State, it is however necessary for that taxable person to have the right to dispose of those human and technical resources in the same way as if they were its own, on the basis, for example, of employment and leasing contracts which make those resources available to it and cannot be terminated at short notice”.

With reference to the second point, the Court recalls that the existence of a permanent establishment for VAT purposes cannot depend solely on the legal status of the relevant entities but must be assessed in light of economic and commercial reality. Therefore, the fact that a company owns a subsidiary in a Member State does not in itself means that it also has its own permanent establishment there.

Regarding the third point, the Court reiterates that “a legal person, even if it has only one customer, is assumed to use the technical and human resources at its disposal for its own needs”. Therefore, in order to verify the existence of a permanent establishment for VAT purposes, it is necessary to prove that, due to the applicable contractual provisions, a company receiving services disposes of its service provider’s means as if they were its own.

Therefore, the fact that the human and technical means present in Belgium belong to Cabot Belgium does not exclude the possibility that Cabot Switzerland has a permanent establishment in Belgium, as long as it has immediate and permanent access to those means as if they were its own. In this regard, to the extent that Cabot Belgium has undertaken to use its own equipment exclusively for the manufacture of the products under the agreement with Cabot Switzerland and these services constitute almost all of Cabot Belgium’s turnover, the service provider remains responsible for its own means and provides these services at its own risk (i.e., the service contract, although exclusive, does not have the effect that Cabot Belgium’s means become those of its client).

With regard to the fourth point, the Court highlights that a distinction must first be made between the provision of tolling services provided by Cabot Belgium to Cabot Switzerland and the sale by the latter of the goods resulting from those same services. Indeed, said services and supplies constitute separate transactions subject to different VAT regimes. Moreover, the same means cannot be used simultaneously to supply and receive the same services. Therefore, the Court, without prejudice to the assessment of the national court in the present case, points out that it does not appear to be possible to distinguish the means used by Cabot Belgium for its tolling supplies from those which, according to the tax authorities, would be used by Cabot Switzerland to receive such supplies in Belgium, since the possible permanent establishment for VAT purposes would consist only of the means belonging to Cabot Belgium.

Finally, regarding the fifth point, the Court clarifies that the fact that the service provider facilitates, through the provision of additional services regulated in the agreement between the parties, the economic activity of Cabot Switzerland, i.e., the sale of the products in Belgium, does not affect the question regarding the existence of a permanent establishment for VAT purposes. This is because this activity must be kept distinct from the possibility for Cabot Switzerland to have means in Belgium capable of receiving and using the services provided by Cabot Belgium.

In light of these considerations, therefore, the Court concludes that the services rendered by Cabot Belgium are received and utilized by Cabot Switzerland for its economic activity in Switzerland, since that company does not have a suitable structure in Belgium for that purpose.

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Davide Accorsi

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