Point of attention: subsidiary as a fixed establishment for VAT purposes

Background of these developments

The approach of tax authorities in several EU Member States towards foreign-based companies has become increasingly strict, following earlier CJEU case law that encouraged authorities to assess business presences on a standalone basis or or within broader CIT/BEPS strategies. However, the CJEU judgment in SC Adient (C‑533/22) confirms the limits on treating a subsidiary as a VAT fixed establishment. The Court clarified that merely being part of the same corporate group or providing services for a foreign parent company does not automatically create a fixed establishment. 

What is a fixed establishment for VAT purposes?

A fixed establishment is defined as any establishment, characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to provide the supply of goods and services. This concept is particularly relevant for the supply of services, but it may also be relevant for the supply of goods in certain cases.

Importantly, a local branch does not automatically qualify as a fixed establishment of a foreign parent simply because it provides services or manufacturing on the parent’s behalf. Group membership or contractual arrangements alone are insufficient. To constitute a fixed establishment, the branch must have distinct, dedicated human and technical resources under its control, which are used to receive and utilize the services for its own purposes. 

For businesses operating across the EU, this highlights the need to carefully assess the structure and use of resources in subsidiaries or branches when determining the place of supply and VAT obligations.

Implications of the latest developments

CJEU rulings, including SC Adient (C‑533/22), clarify when a subsidiary of a foreign parent company may be considered a VAT fixed establishment. By ‘subsidiary,’ we refer to a separate legal entity, distinct from a branch. Only distinct, dedicated resources that are permanently available to the foreign company are relevant.

Where a fixed establishment does exist, the place of supply may shift, potentially creating VAT obligations in another EU Member State. The entity that carries out the supply primarily bears the risk of incorrect VAT treatment. Also in intercompany transactions, the recipient of a supply must exercise caution, as VAT stated on an incorrectly issued invoice is not deductible,. Monitoring these transactions carefully is strongly recommended. 

How to determine the interference of a VAT fixed establishment?

Suppliers cannot assume that a company has a VAT fixed establishment solely because it has a subsidiary or branch in another EU country. Certain specific criteria must be met.

1. First of all, you should examine the nature and use of the service provided to the recipient.
2. Next, where that examination does not enable the fixed establishment, it is necessary to pay particular attention to whether the contract, the order form and the VAT identification number attributed by the Member State of the recipient and communicated to him identify the fixed establishment as the recipient of the service and whether the fixed establishment is the entity paying for the service.
3. Lastly, where the two abovementioned criteria do not enable the fixed establishment of the recipient to be identified, the supplier may legitimately consider that the services have been supplied at the place where the recipients has established his business.

Suppliers and recipients generally do not need to deeply investigate internal contracts between the parent company and subsidiary, especially in intercompany transactions where both parties are aware of contractual arrangements.

More information?

Determine whether your organization or your client has a fixed establishment for VAT purposes and whether or not these abovementioned implications apply to your situation is essential to anticipate potential obligations. In case the Tax Authorities start raising questions it is best to be prepared beforehand. For more information please contact our VAT specialist.