Whether existence of a subsidiary in a Member State creates a fixed establishment of the parent company
The ‘Place of Supply’ rules –the rules that determine where, for VAT purposes, a supply of goods or services takes place are set out in the VAT Directive. These rules are then expanded in EU regulations that are designed to ensure a common interpretation of the VAT Directive throughout the EU. Article 44 of the Directive sets out the general rule for supplies of services and states that in a situation where the customer is a business, the place of supply of services is where the customer is established, has a fixed establishment or in the absence of either, where he usually resides. The implementing regulations then provide further details on how to determine where a person is established or has a fixed establishment.
In this case, Dong Yang is a Polish company with an establishment in Poland. Its customer, LG Display Ltd is established in South Korea. LG Display Ltd also has two subsidiaries in Poland (LG Poland and LG Poland Sales). Under the terms of the contract with LG Display Ltd, Dong Yang was required to provide services (the assembly of parts belonging to LG Display Ltd). Once the parts had been assembled, the goods were ‘shipped’ to LG Poland which, under a separate contract with LG Display Ltd, provided storage facilities and logistic services and when the goods were ‘complete’ they were then sold by LG Display Ltd to LG Poland Sales for onward supply to the EU market.
Although it was registered for VAT in Poland, LG Display Ltd advised Dong Yang that it did not have any business establishment or a fixed establishment in Poland and, in accordance with Article 44 general place of supply rule, Dong Yang considered that the place of supply was in South Korea where LG Display Ltd did have its establishment. However, the Polish tax authorities took the view that through its contractual arrangements with its subsidiaries in Poland, LG Display Ltd had an establishment in Poland and that Dong Yang’s services were, in fact, supplied to that Polish establishment. The Polish tax authorities thus sought to subject the supply of services to Polish VAT considering that the place of supply was Poland and not South Korea. Dong Yang appealed that decision and the Polish court sought clarification on the law from the Court of Justice.
In its judgment issued 7 May 2020, the Court of Justice has confirmed that Article 44 of the VAT Directive and Article 11(1) and Article 22(1) of the implementing regulations must be interpreted such that the existence of a permanent establishment of a company established in a third State cannot be deduced by a service provider simply because that company has a subsidiary there.
Moreover, the supplier cannot be required to make extensive enquiries into the contractual relationships and obligations between its customer in a third State and its subsidiaries in the Member State. The Directive and the implementing regulations require a taxable person to exercise a reasonable degree of care in determining the correct place of supply. However, this does not include seeking out and verifying inaccessible contractual relationships between his contracting party and that party’s subsidiaries.
Comment –determination of the place of supply is one of the fundamental requirements of the EU VAT system as it determines not only where the tax becomes chargeable, but also confirms which tax jurisdiction is entitled to collect the tax. Here, the Polish tax authority considered that, in light of the contractual arrangements and obligations that subsisted between LG Display Ltd and its Polish subsidiaries, (facts that were unknown to Dong Yang), Dong Yang’s supplies were, somehow made to a fixed establishment of LG Display Ltd in Poland and subject to Polish VAT. The Court of Justice has confirmed that the existence of a subsidiary in a Member State does not create a business establishment of the third State parent company. It also confirms that the supplier cannot be required to do more than take reasonable steps to determine the correct place of supply