InDisputes: CJEU's decision on 'Fixed Establishment' for VAT purposes

On 29 June 2023 the Court of Justice of the European Union ("CJEU") published its decision in Cabot Plastics (C-232/22), which is the latest in a series of recent decisions addressing the concept of a fixed establishment ("FE") for VAT purposes.  

As the EU legislative provisions concerning FEs[1] are drafted in a relatively broad manner, EU Member States have adopted varying interpretations of the test for the existence of an FE and this has given rise to persistent litigation.  This decision should contribute to increased certainty for practitioners and tax authorities in this area of VAT law.

Factual background

The case involved a Belgian company, Cabot Plastics Belgium SA, ('Cabot Belgium') which provided toll manufacturing services and ancillary services to an affiliated company, Cabot Switzerland GmbH ('Cabot Switzerland').  The question for the CJEU was whether the toll manufacturing activities of Cabot Belgium (using raw materials owned by Cabot Switzerland to manufacture finished products) created a fixed establishment ('FE') of Cabot Switzerland in Belgium for VAT purposes.  Cabot Belgium treated the place of supply of its services as Switzerland (outside the EU) and therefore, Cabot Belgium did not charge VAT on the services it provided to Cabot Switzerland.  Following an audit in 2017, the Belgian tax authorities argued that the Swiss company had a FE in Belgium, and, accordingly, that the tolling services provided were received by the FE in Belgium and should be subject to Belgian VAT.

CJEU Decision

The key takeaways from the CJEU decision are as follows:

• The Court began by reiterating the principle that the primary and default point of reference for determining the place of supply is the place of main establishment of a business as this criterion is simple and practical and contributes to legal certainty.  It is generally only if this approach gives rise to irrational results or creates a conflict with another Member State that the secondary test concerning FEs should be applied. 
• The Court noted that the test for whether a service is supplied to an FE (as distinct from the place of main establishment) requires an analysis as to whether there is an establishment in such location characterised by 'a sufficient degree of permanence and a suitable structure in terms of human and technical resources' to receive and use services supplied to it for its own needs. 
• Regarding the requirement for human and technical resources, the Court found that such resources cannot exist only occasionally.  In addition, the taxable person need not necessarily 'own' the resources, but must have the right "to dispose of those human and technical resources in the same way as if they were its own".  The CJEU gave the example of employment and leasing contracts which make the resources available to such person and which cannot be terminated at short notice.
• In addition, the Court held that as Cabot Belgium remained responsible for its own resources and provided the tolling services at its own risk, the mere fact that it provided services exclusively to Cabot Switzerland did not in and of itself mean that its resources belonged to Cabot Switzerland.
• The Court emphasised the importance of distinguishing between the 'distinct transactions' of (i) the services provided under the toll manufacturing agreement between the Belgian and Swiss entities, and (ii) the supply of finished goods by Cabot Switzerland to third parties, as the two supplies are subject to different schemes of VAT.  This followed on from an equivalent finding of the Court in another decision, Berlin Chemie (C-333/20).  The Court found that the tolling services were received by Cabot Switzerland (for its business of selling goods) in Switzerland, since it did not have a suitable structure in Belgium to receive and use the tolling services supplied.
• Importantly, the Court also held that the same resources 'cannot be used both to provide and receive the same services'.  It was stated that Cabot Switzerland did not appear to have a FE in Belgium (through the resources of Cabot Belgium) on the basis it was not possible (from the information before the Court) to distinguish the resources which Cabot Belgium uses to provide it tolling services, and the resources allegedly employed by Cabot Switzerland to receive the tolling services in Belgium.  This aspect of the decision also followed the precedent of Berlin Chemie (C-333/2).

Conclusion

This decision follows on from the CJEU's recent jurisprudence in relation to the test for the existence of an FE for VAT purposes and provides further clarity in this area, in particular for companies receiving toll manufacturing services from EU suppliers.  

If you would like to discuss the impact this decision may have for your business, or indeed discuss any other matters, please contact Indirect Tax partners Matthew Broadstock and Dara Higgins or your usual Matheson contact.