Early in May 2020 The long-awaited judgment of the Court of Justice of the European Union on the establishment of the place of business for VAT purposes was published.
In the light of this, the fact that a subsidiary is in the territory of a country is not a decisive circumstance for the existence of a permanent place of business in that country.
However, the carrying out of an additional analysis, in addition to receiving a declaration from the contracting authority may be required, should not include the examination of commercial relations between the contracting authority and its counterparties, including its subsidiaries.
The case came before the TSUE from a preliminary question asked by the Provincial Administrative Court in Wrocław. It concerned services provided by the Polish company to the Korean company. Materials and components were delivered to the Polish company from .o.o. by another Polish limited liability company.
which is a subsidiary of the Korean contracting entity. The customer of the service was a Korean company, while the involvement of its Polish subsidiary was to provide and collect materials.
The Polish company issued invoices to the Korean contracting authority for assembly services, not including Polish VAT, treating these services as performed outside Poland.
It is unacceptable for the taxpayer to expect due diligence in obtaining information about the counterparty at a level of detail similar to what the tax authority may obtain in this respect.
Position of the Polish court
The Polish tax authority (IAS Director in Wrocław) considered that these services should be treated as taxable VAT in Poland, as the company that received the materials after the service was performed, as a subsidiary of a Korean company, should be considered as a permanent place of business of the Korean contracting authority.
On the basis of his position, the Director of IAS indicated that he had verified the contractual relations between the Korean company and its subsidiary, and on this basis considered that the Korean company had actually used its subsidiary as a permanent place of business in Poland.
On the other hand, the Polish contractor indicated that it was based on a declaration from the contracting authority that the company did not have a permanent place of business in Poland.
The Polish company brought a complaint against the decision of the tax authority, alleging the infringement Article 44 Directive 2006/112, and Article 11(1) and Article 21(22) Implementing Regulation No Regulation (EU) 282/2011.
When examining the case, the WSA in Wrocław considered whether the mere fact that a non-EU subsidiary is owned in Poland could prejudge the existence of a permanent place of business in Poland and to what extent the Polish service provider should carry out verification of the status of the contracting entity, whether it is sufficient to rely on the declarations of the contracting entity, or whether it should also investigate other circumstances, including its relationship with the subsidiary. On the basis of such facts, the WSA formulated 2 questions:
Is the fact that a company established outside the European Union, a subsidiary in the territory of Poland, can be derived from the existence of a permanent place of business in Poland within the meaning of Article 44 VAT Directives and Article 11(1) Implementing Regulation (EU) No Regulation (EU) 282/2011?
Is there a negative answer to the question first, entity third is obliged to analyse contractual relations between a company established outside the European Union and a subsidiary in order to determine whether there is a permanent place of business in Poland by that company first A partnership?
TEU conclusions
The CJEU, after examining the case, made proposals that could be crucial for many similar facts.
The service provider must not have a permanent establishment in the territory of the Member State of establishment of a company established in the State. third, solely based on the fact that the company has a subsidiary in that Member State.
It follows from this wording that the fact that a subsidiary is owned will not be a decisive circumstance for the existence of a permanent place of business, but leaves an open opportunity to take account of that fact as one of the premises.
In particular, in the same judgment, the court noted that taking account of economic and commercial reality constitutes a fundamental criterion for the application of the common VAT system.
Responding to second the question concerning the scope of the examination to be carried out by the contracting authority, the court gave a fairly cautious answer, indicating that from the implementing Regulation No.
Regulation (EU) 282/2011 there is no obligation for the provider to examine contractual relations between a company established in the country third and its subsidiary established in a Member State to determine whether first they have a permanent establishment in that Member State.
The Court also pointed out that it is of particular importance that any verification activities which may be carried out under the Implementing Regulation No.
Regulation (EU) 282/2011 should relate to a service contract between the service provider and the taxable person, and not to a contractual relationship between that taxable person and an entity which may, as appropriate, be regarded as its permanent place of business.
Therefore, the Court of First Instance points out that the appropriate procedure to determine whether the applicant has a permanent place of business in the territory of the country involves first Analysis of the nature and application of the service provided second any activities indicated under Article 22 implementing Regulations Regulation (EU) 282/2011, including, in addition to the receipt of a declaration from the contracting authority, the verification of the situation on the basis of documents such as the contract, the contract and the VAT identification number granted by the Member State to the recipient and transmitted to the service provider by the recipient.
Such analysis may be necessary to demonstrate that the taxpayer has exercised due care. At the same time, taxpayers cannot be expected to carry out verifications on the basis of documents and information to which they do not and should not have access.
Such documents shall certainly include the content of commercial agreements and agreements concluded by the contracting authority with other bodies, including its associated bodies.
In conclusion, it is also worth mentioning that in a case which has become the cause of the questions referred for a preliminary ruling and the delivery of the judgment in question, the Polish tax authority used information obtained during tax proceedings on the basis of Tax Ordinance and on this basis it resulted in the existence of a permanent place of business in Poland. In this case, there is a far-reaching disparity between the taxpayer's ability to obtain information and the opportunities that tax authorities have.
It is our experience that this problem arises in many disputes with tax authorities and we strongly agree that it is unacceptable for the taxpayer to expect due diligence in obtaining information about the counterparty at a level of detail similar to what the tax authority can obtain in this respect. Surely the published judgment is a step in the right direction, but it does not mean that it will be significantly easier to establish the existence of a permanent place of business in many similar factual states.
Source: Dong Yang judgment, TSUE C-547/18
Author
Leszek Dutkiewicz, partner Russell Bedford Poland. Associated with the company from 2011. Director of RBP office in Katowice. In years 2008 – 2011 worked for leading consulting companies (Ernst&Young, KPMG, BDO) providing tax advisory services.
He specializes in tax and economic law, primarily in international tax law, tax proceedings, VAT and transaction prices. Author of a publication on tax, civil and international law issues. Lecturer in tax law training. He has legal education, in 2008 graduated from the Faculty of Law and Administration of the Jagiellonian University.