Toll manufacturer is not a VAT fixed establishment

29/06/23

The VAT fixed establishment concept has dominated the agenda of the European Court of Justice (hereinafter: ECJ) in recent years. It follows from earlier case law of the ECJ that a subsidiary can be a fixed establishment of its parent or at least can constitute a fixed establishment of that parent. This has led to the present case in which the highest Belgian court now doubts whether a Swiss company would have a fixed establishment in Belgium, because the Belgian company acts as a tolling manufacturer for the Swiss company. However, according to the ECJ, the tolling agreement does not lead to a fixed establishment in Belgium.

What is the impact on your organisation?

The outcome of this case leads to a pleasant situation for the interested party. The outcome is also pleasant for entrepreneurs who work with such tolling agreements because there is now clarity.

We assume that this will provide clarity for many cases in practical implementation, partly because this judgment clearly builds on the line that was initiated in the Berlin Chemie judgment (C-333/20). It should be noted, however, that the ECJ still leaves open the possibility that a separate legal entity can form a fixed establishment of another entity. Some discussion on this point is therefore possible.

Due to this lack of clarity, we advise entrepreneurs who are active in different Member States to identify whether or not they have a fixed establishment in those Member States.

Background

This case concerns a company under Swiss law, Cabot Switzerland GmbH (hereinafter: GmbH), which is part of the Cabot group. GmbH is active in Belgium with the sale of carbon-based products and is also registered for VAT purposes. GmbH has entered into a tolling agreement with an affiliated (separate, legal) trading company within the Cabot group (not a subsidiary), Cabot Plastics. Based on this agreement, Cabot Plastics only uses its own equipment to manufacture plastics for the benefit of GmbH. The services that Plastics GmbH provides for GmbH represent almost all of its income. Part of the agreement is that Cabot Plastics provides additional, customary tolling services, such as the storage of raw materials and end products, conducting internal and external (quality) checks during the production process, providing administrative support and acting on behalf of the GmbH to the outside world regarding the import of goods.

The Belgian tax authorities carried out a tax audit in 2017 and concluded that the GmbH would have a fixed establishment for Belgian VAT purposes. Therefore, the services provided by Cabot Plastics to GmbH should be subject to Belgian VAT since, according to the Belgian authorities, the place of supply for VAT would be in Belgium. Cabot Plastics disagreed and argued before the Belgian court that the services it invoiced to GmbH did not take place in Belgium, but in Switzerland and were therefore not subject to Belgian VAT.

The Belgian State argued before the highest Belgian court that although the GmbH does not have its own personnel in Belgium, it must be deemed that Cabot Plastics makes them available to the GmbH for the implementation of the tolling agreement. Furthermore, the Belgian State is of the opinion that GmbH has a sustainable, suitable structure that enables it to deliver the products resulting from the tolling agreement from its fixed establishment in Belgium.

Following preliminary questions from the highest Belgian administrative court, the ECJ concludes that GmbH does not have a fixed establishment in Belgium under the tolling agreement, because it does not have an appropriate structure in terms of human and technical resources that would lead to a fixed establishment in Belgium.

The ECJ substantiates the foregoing as follows. According to the ECJ, the fact that Cabot Plastics is a separate legal entity is not in itself a reason to conclude that GmbH could not have a fixed establishment for VAT purposes in the same Member State. Furthermore, the fact that human and technical resources do not belong to GmbH, but to Cabot Plastics, is also no reason to conclude that there could be no fixed establishment for VAT, provided that GmbH had permanent and immediate access to should have access to these resources as if they were its own resources.

The ECJ then points out that there are two separate activities: on the one hand, the tolling services provided by Cabot to GmbH and, on the other hand, the sale of goods by GmbH resulting from the tolling services. It is therefore necessary to consider where the place of service is with regard to the services received by the GmbH and where the human and technical resources are used for this purpose. It notes, however, that the same resources cannot be used both to provide services and to receive the same services.

The fact that Cabot Plastics provides GmbH, under the tolling agreement, with a series of additional services that contribute to the economic activity of GmbH, does not change the ECJ's opinion.