On 7th May 2020 the Court of Justice of the European Union (“CJEU”) announced its judgment in the Polish case C-547/18 Dong Yang Electronics (“Dong Yang”). The judgment was looked forward to by many taxpayers, particularly due to the groundbreaking opinion of the Advocate General issued in the case.
The judgment pertains to the possibility of creating a fixed establishment (“FE”) of a foreign entity by its subsidiary as well as to the extent of the service-provider’s obligations in the scope of assessing the existence of the contractor’s local FE.
Background of the case
In the case at hand, Dong Yang – a Poland-based company, provided assembly services for a Korean company belonging to a capital group not related to the taxpayer. Dong Yang treated the services for the Korean company as VAT taxable outside Poland (according to the general B2B rule) and issued invoices without Polish VAT.
This approach has been challenged by Polish tax authorities, according to which Dong Yang provided the services for an FE of the Korean entity which had been created in Poland due to the Korean entity’s cooperation and use of assets of its subsidiary.
The judgment at hand concerns a vital and long raising doubts issue of the place of VAT taxation of services provided for foreign entities. It is particularly important for the Polish entrepreneurs providing services for contractors seated outside the EU having subsidiaries in Poland, but also for local, unrelated partners supporting business.
Essentially, CJEU’s position is positive for taxpayers. According to the judgment, the service provider:
- cannot perceive a sole fact that a third-country entity has a subsidiary in a Member State as determining the existence of an FE of such entity, and
- is not obliged to assess, in order to determine whether an FE exists, contractual relations between these two entities.
The judgment maintains the conclusion deriving from the previous CJEU case law that a subsidiary may create an FE of a parent company from a third country. However, the sole fact of existence of such subsidiary is not sufficient to make such conclusion, and the issue must be assessed taking into account economic and commercial reality. Moreover, such assessment should be limited to relations between the service provider and the service recipient, and not the service recipient and its subsidiary.
Consequences for taxpayers
While CJEU adopted a position favorable for taxpayers, it should be noted that it did not directly repeat the much more clear-cut conclusions of the Advocate General. These, on the other hand, went beyond the fact pattern of the Dong Yang case and referred to a general possibility of FE creation.
Nevertheless, the judgment at hand raises certain questions. Namely, CJEU indicated that a service provider cannot be obligated to assess the contractual relations between a parent company and its subsidiary. It is not clear if this should also apply to the situation when the services are provided between related entities. Another doubt is whether the conclusion of the judgment applies only to the situation where the service recipient is based in a third country or if it as well applies to a service recipient from a Member State.
There is no doubt that the judgment’s conclusion takes into account actual conditions of business activity, grandfathering taxpayers from unproportionally burdensome obligation of assessing the fact pattern to the extent exceeding the due diligence, and hence it should be seen as positive.