CJEU on fixed establishment – Case C-232/22, Cabot Plastics

The provision of toll manufacturing services to a taxable person from another country does not necessarily create a fixed establishment of the recipient in the Member State of the supplier, the CJEU ruled in the judgment of 29 June 2023 in case C-232/22, Cabot Plastics Belgium.

This is another extremely important judgement of the CJEU on one of the most controversial issues within the EU VAT system – that is, the concept of fixed establishment (FE).

What is this all about?

A fixed establishment is a legal construction that may cause change of the place of supply (i.e., place of taxation) of services[1] where the service provider and the service recipient have their businesses established in different countries.

The basic rule is that the place of supply of services (B2B) is the place where the recipient has stablished its business. Therefore, if, for example, a Polish taxable person supplies services to a taxable person  established in Germany, then, as a rule, the place of supply of such a service is Germany. This makes it subject to VAT in Germany and the person liable to pay the tax is, as a rule, the German recipient[2]. However, everything changes if the German recipient has a fixed establishment in another Member State and the services are supplied to that fixed establishment. Thus, if the German recipient has a fixed establishment in Poland, then in the above example the place of supply would be Poland and the Polish service provider would be required to settle Polish VAT.

Therefore the difference is significant and an incorrect tax settlement could be costly.

So what has happened in Belgium?

Cabot Switzerland GmbH (Cabot CH) is a company based in Switzerland, registered in Belgium for VAT purposes in connection with its trading activities there. Cabot CH concluded tolling contracts with a number of entities, including the Belgian company Cabot Plastics (Cabot BE). Cabot CH and Cabot BE belong to the same group and are indirectly financially linked, though are formally independent entities.

Pursuant to the provisions of the contract, Cabot BE receives raw materials purchased and owned by Cabot CH and then uses them to produce plastics for Cabot CH. The plastics produced are stored by Cabot BE before being sold to Cabot CH customers. The receipt and transport of goods from Cabot BE is carried out either by Cabot CH customers or by third-party carriers used by Cabot CH

Furthermore, in addition to the above manufacturing services, Cabot BE provides Cabot CH with a number of ancillary services such as warehousing, logistical assistance, technical checks and assessments. Cabot BE supplies these ancillary services in accordance with the conditions set out in the contract.

As a result of a tax audit, the tax authority concluded that the activities of Cabot BE make this company a fixed establishment of Cabot CH in Belgium and therefore the services supplied by Cabot BE to Cabot CH should be subject to VAT in Belgium.

Questions referred for a preliminary ruling

The court decided to suspend the proceedings and referred questions to the CJEU for a preliminary ruling on the following issues:

1. In the facts presented, due to production services purchased under an exclusive contract, should the recipient be deemed to have FE in the Member State of its service provider?

2. May a service recipient use FE if the human and technical resources required are those of its service provider, which belongs to the same group (but is legally independent), and it is obliged to use those resources exclusively to provide those services?

3. Should a service recipient be considered to have FE in the Member State of its service provider if that service provider carries out for him a number of ancillary or supplementary services in relation to tolling in the strict sense, thus contributing to the completion of sales concluded by that taxable person in its place of business outside the European Union but which result in taxable supplies of goods under the VAT legislation take place in the territory of that Member State?

CJEU position

This may sound a bit surprising but in a number of judgments the CJEU considered whether a formally independent entity (such as a commercial law company) can act in a dual capacity – on the one hand, to be an independent taxable person and, on the other hand, to be a fixed establishment of another taxable person (for example – CJEU judgments in cases C-260/95 DFDS, C-605/12 Welmory, C-547/18 Dong Yang, C-333/20 Berlin Chemie) and did not exclude that in certain circumstances such a situation may be possible.

Therefore, we awaited the decision with some anxiety. Fortunately, it turned out that there was no cause for concern.

The CJEU ruled that a service recipient (legally separate from its service provider) does not have a fixed establishment in the Member State in which its service provider providing production services is established, if such a service recipient does not have a separate (own or controlled) permanent human and technical resources in that Member State. What is particularly important, the CJEU found that it is irrelevant whether the service provider supplies the service recipient with production services based on an exclusive contract and whether the service supplier provides a number of ancillary or supplementary services that contribute to the sales of the service recipient in the service provider’s Member State.

In its judgment, the CJEU emphasized that the fact that the human and technical resources do not belong to Cabot CH, but to Cabot BE, does not exclude the possibility of Cabot CH having FE in Belgium, however, for that purpose, the condition of Cabot CH having permanent and immediate access to those facilities must be fulfilled. In practice, this condition would be met if Cabot CH could be considered to control these resources as it would control its own employees and its own assets. Cabot CH would therefore have the possibility to freely dispose of these resources – for which a standard toll manufacturing agreement does not allow for.

The CJEU further underlined (as in the Berlin Chemie) that the technical and human resources of the service provider cannot at the same time constitute the resources of the service recipient, which, by supplying the services to this recipient, creates an element that gives rise to a fixed establishment of that service recipient.

Conclusions

Firstly, let us hope that the slight frenzy that the tax authorities of EU Member States fell into regarding the, let’s say – misuse of the concept of a fixed establishment for purely fiscal purposes is slowly receding. Admittedly, the CJEU is still not willing to adopt the highly reasonable solution proposed by Advocate General J. Kokott in her great opinion in Dong Yang to adopt as rule that a formally independent entity cannot be both an independent taxable person and a fixed establishment of another taxable person (unless we are dealing with a fraudulent activity), but in subsequent decisions limits the possibility of recognizing such a dual role of the taxable person.

Secondly, in recent years, Polish tax authorities have assumed on a number of occasions that toll manufacturing services supplied by Polish taxable persons on similar terms to those analyzed by the CJEU constitute a fixed establishment of the service recipient in Poland (and therefore are taxable in Poland). The judgment in question may provide the basis for making adjustments and recovering overpaid tax. Each case is different – but it is worth to analyze whether in a specific situation of a Polish taxable person who may have unnecessarily settled VAT in Poland, the amount paid could now be recovered.

[1] This structure is only minimally applicable to goods

[2] For certain services, the legislation provides for other solutions