Subsidiary = fixed establishment? Not always – the CJUE judgment in the case of Dong Yang Electronics Sp. z o.o.
On May 7, 2020, the Court of Justice of the European Union (CJEU) issued a judgement in case C-547/18, which concerned a fixed establishment for VAT purposes in connection with a subsidiary in the Republic of Poland.
The case concerned Dong Yang, a company incorporated under Polish law, which provided services to a Korean entity, LG Korea, having its subsidiary in Poland, LG Poland. The service provided by Dong Yang consisted in assembling printed circuit boards (PCB) from materials and components owned by LG Korea.
Although the contract for the supply of services was between Dong Yang and LG Korea, the materials for the assembly of the systems were provided by the subsidiary. The invoices for the services rendered, issued by Dong Yang to LG Korea, were treated as taxable for VAT purposes in Korea. Due to the above circumstances, a difference arose between the Polish tax authorities and Dong Yang as to whether the service should be considered as having been provided to the LG Korea or its subsidiary.
The Director of the Tax Administration Chamber in Wrocław, stated that LG Poland constituted a fixed establishment of LG Korea, thus the collection and payment of VAT should take place in Poland. In the tax authority’s opinion, the analysis of factual state and determination of the actual recipient of the services provided was the responsibility of the Polish company, and LG Korea's statement that there is no fixed establishment should not be taken into account at all. As a result, the authority requested Dong Yang to pay the tax on the services provided.
As a result of a complaint filed by the Polish company, the case was referred to the Regional Administrative Court in Wrocław, which sought the following preliminary rulings from the CJEU:
- Is having a subsidiary in the territory of Poland (LG Poland) based in a non-Member State (LG Korea) the same as having a fixed establishment?
- In the event that a subsidiary (LG Poland) cannot be regarded as a fixed establishment, is the supplier of services (Dong Yang) required to analyse the relationship between the Korean company and its subsidiary?
According to the CJEU’s standpoint, the mere fact of LG Korea having a subsidiary in the territory of Poland does not prejudge its having a fixed establishment there. Therefore, it is not permissible to equate those two terms.
Moreover, the Polish service provider is not obliged to examine contractual relations between related parties. Article 22 of Implementing Regulation No 282/2011 does not define such an obligation in any way. Therefore, when determining the place of supply of services, a company may limit itself to an analysis of the application of the services provided and, if this analysis proves insufficient, verify: the agreement, the order or the VAT identification number. As a last resort, the company should determine whether the fixed establishment coincides with the entity paying for the service. Only when the activities described above do not make it possible to establish a fixed establishment should the services be deemed to be supplied to the place where the recipient of the service is established. Therefore, the issuance of invoices by Dong Yang without Polish VAT should not be questioned.
The CJUE judgement, despite the fact that it undoubtedly speaks in favour of Dong Yang, does not include unambiguous guidelines which may facilitate other entities assessing this issue, nor does it exempt taxpayers from exercising due diligence in determining the proper place of performance. However, it does indicate that the supplier of services is not obliged to study the relationship between a subsidiary and its parent company.
Nevertheless, it is highly probable that the judgement will reduce the abuse and the assumption by the Polish tax authorities of the oversimplification that a subsidiary constitutes, in a way, a fixed establishment of a foreign entity in the territory of a given country.
Natalia Szymocha, Tax Consultant, ATA Tax Sp. z o.o.
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