On June 13, 2024, the Court of Justice of the European Union (CJEU) issued a decision in case C-533/22 (SC Adient Ltd & Co. KG). The ruling pertains to whether a controlled company or a group company should be regarded as a fixed establishment for VAT purposes.
This briefing document analyses the judgment of the European Court of Justice (ECJ) in Case C-533/22 (SC Adient Ltd & Co. KG) concerning the interpretation of VAT fixed establishment rules within the EU, based on provided sources including FAQs, the Advocate General’s Opinion, an ECJ Study Guide, and a VAT news update.
1. Introduction:
This briefing document reviews the key themes and important ideas arising from the provided sources related to the ECJ’s judgment in the Adient case (C-533/22). The case addresses the crucial question of when a company can be considered to have a VAT fixed establishment in an EU member state other than where its main business is established, particularly within the context of group structures and service agreements. The Romanian tax authorities had argued that Adient DE (established in Germany) had a fixed establishment in Romania due to its contract manufacturing arrangement with its group company, Adient RO. This interpretation would have shifted the place of supply for VAT purposes.
2. Main Themes and Important Ideas:
2.1. Rejection of Group Affiliation and Service Contracts as Sole Indicators of a Fixed Establishment:
A central theme across all sources is the ECJ’s clear rejection of the notion that mere membership within the same group of companies or the existence of a service contract is sufficient to establish a VAT fixed establishment.
- The FAQ explicitly states: “No. The Court of Justice of the European Union (CJEU) in the Adient case (C-533/22) clearly ruled that the mere fact that two companies belong to the same group or are bound by a service contract is not sufficient in itself to establish a fixed establishment for Value Added Tax (VAT) purposes.”
- The Advocate General (AG) Kokott’s Opinion strongly supports this, stating: “For the purposes of the second sentence of Article 44 of Directive 2006/112, an independent group company (in another Member State) is not to be regarded as a fixed establishment of a different group company on the sole basis of a link recognised under company law.”
- The ECJ Judgment Summary on VATupdate highlights: “a company subject to value added tax having its business in one Member State, which receives services provided by a company established in another Member State, cannot be regarded as having a fixed establishment in that other Member State… solely because the two companies belong to the same group or those companies are bound as between themselves by a contract for the provision of services.” (Emphasis in original).
- The ECJ Study Guide reinforces this in its “Key Takeaways”: “Group Affiliation Alone is Insufficient: The ECJ clearly ruled that simply belonging to the same group of companies or having a contractual agreement between entities is not enough to establish a fixed establishment for VAT purposes.”
2.2. Emphasis on the Service Recipient’s Own Sufficient and Permanent Resources:
The judgment underscores that a VAT fixed establishment requires the service recipient to possess its own distinct and sufficiently permanent human and technical resources in the other member state that enable it to receive and use the supplied services for its own business needs.
- The FAQ defines a fixed establishment as “characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources that enables it to either receive and use services supplied to it for its own needs, or to supply services it provides. These resources must be distinct from those of the service provider.”
- The AG’s Opinion notes that “Article 11(1) of the VAT Implementing Regulation sets out criteria such as a sufficient degree of permanence of the establishment, and a structure that enables it to receive and use services. None of those criteria are of a company-law nature.”
- The ECJ Study Guide’s definition of “Fixed Establishment (VAT)” includes: “characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own business needs, or to supply services it provides.”
2.3. Irrelevance of the Subsequent Supply of Goods and Their Destination:
The ECJ ruled that the fact that the goods manufactured as a result of the services were mostly sold outside Romania was irrelevant to determining whether Adient DE had a fixed establishment in Romania for the purpose of receiving the manufacturing services.
- The FAQ directly addresses this: “No. The Advocate General considered that the place where the goods manufactured as a result of the services are ultimately consumed or sold is irrelevant for determining whether a fixed establishment of the service recipient exists for the purpose of the initial manufacturing services.” The FAQ quotes the AG, stating: “VAT does not tax actual consumption in this context, but rather the expense of purchasing the service.”
- The ECJ Judgment Summary confirms that “neither the fact that a company… has in that other Member State a structure which intervenes in the supply of the finished products… nor the fact that those supply transactions are carried out mostly outside that Member State… are relevant to establishing… that that company has a fixed establishment in that other Member State.”
- The ECJ Study Guide highlights: “Irrelevance of Subsequent Supplies: What the recipient of the services does with the goods or services afterwards (e.g., supply of goods) does not determine whether they have a fixed establishment for receiving the initial services.”
2.4. Distinction Between Resources for Supplying and Receiving Services:
The judgment emphasises that the same resources cannot be used simultaneously to both provide and receive the same services for a taxable transaction to occur between two distinct entities.
- The FAQ quotes the AG: “If the human and technical resources of the entity providing the services are essentially the same as those alleged to constitute the fixed establishment receiving the services, then, in essence, the ‘supplier’ and ‘recipient’ are the same, negating the existence of a taxable supply.”
- The AG’s Opinion states: “the same means cannot be used both to provide and receive the same services… If the relevant services supplied by Adient RO are actually performed through a branch in Romania, which is, to that extent, simultaneously a fixed establishment of Adient DE, then the supplier (that is to say the party providing the services) is also Adient DE.” In such a scenario, it would be a non-taxable internal transaction.
- The ECJ Study Guide points out: “Distinction Between Resources for Supply and Receipt: If the human and technical resources used to perform the services are virtually the same as those allegedly constituting the fixed establishment receiving the services, a fixed establishment is unlikely to exist for VAT purposes.”
2.5. Preparatory and Auxiliary Activities Do Not Constitute a Fixed Establishment:
Resources involved only in preparatory or auxiliary activities that do not enable the receipt and use of the core services do not create a VAT fixed establishment.
- The FAQ states: “If the resources are only involved in preparatory or auxiliary activities, they do not constitute a fixed establishment.”
- The AG’s Opinion, in discussing Article 53(2) of the VAT Implementing Regulation, implies that activities purely for administrative support may be disregarded when determining a fixed establishment for the supply itself (though this article relates to when a fixed establishment doesn’t intervene in a supply by the head office).
- The ECJ Study Guide notes: “Preparatory and Auxiliary Functions Do Not Create a Fixed Establishment: Resources solely involved in preparatory or auxiliary tasks do not constitute a fixed establishment for VAT purposes.”
2.6. Clarification of Article 44 of the EU VAT Directive:
The Adient judgment clarifies the application of Article 44 of the VAT Directive, which governs the place of supply of services to taxable persons.
- The FAQ explains: “The Adient judgment reinforces that the ‘fixed establishment’ in this context must be a genuine establishment of the service recipient, characterised by its own sufficient and permanent resources, and not merely a related entity or a service provider under contract. The judgment clarifies that group affiliation or a service contract alone does not trigger the application of the fixed establishment rule under Article 44.”
- The ECJ Study Guide states: “Article 44 of the VAT Directive: This article governs the place of supply of services to taxable persons. The judgment clarifies its application in the context of fixed establishments within group structures.”
2.7. Relevance of Article 11 of the VAT Implementing Regulation:
The judgment reinforces the interpretation of Article 11 of Council Implementing Regulation No 282/2011, which defines a fixed establishment.
- The FAQ mentions that a fixed establishment must have “a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs,” echoing Article 11.
- The ECJ Study Guide notes: “Article 11 of Implementing Regulation 282/2011: This article provides further detail on the definition of a fixed establishment. The judgment reinforces the interpretation that mere group membership or contractual links do not equate to a fixed establishment under this article.”
2.8. Potential Implications for Multinational Companies:
The Adient judgment provides greater clarity and legal certainty for multinational companies operating across the EU.
- The FAQ concludes that “This ruling may help prevent tax authorities from incorrectly identifying fixed establishments based solely on group relationships or service agreements, potentially affecting VAT registration obligations and the application of the reverse charge mechanism.”
- The ECJ Study Guide asks in its quiz: “How might the Adient judgment impact businesses operating across EU Member States through subsidiaries or contractual manufacturing arrangements?” The answer highlights that businesses need to assess their own distinct resources in a member state, independent of the service provider.
3. Key Quotes:
- FAQ: “The mere fact that two companies belong to the same group or are bound by a service contract is not sufficient in itself to establish a fixed establishment for Value Added Tax (VAT) purposes.”
- AG Kokott’s Opinion: “an independent group company (in another Member State) is not to be regarded as a fixed establishment of a different group company on the sole basis of a link recognised under company law.”
- VATupdate (quoting the ECJ): “a company… cannot be regarded as having a fixed establishment in that other Member State… solely because the two companies belong to the same group or those companies are bound as between themselves by a contract for the provision of services.”
- FAQ (quoting AG Kokott): “VAT does not tax actual consumption in this context, but rather the expense of purchasing the service.”
- FAQ (quoting AG Kokott): “If the human and technical resources of the entity providing the services are essentially the same as those alleged to constitute the fixed establishment receiving the services, then, in essence, the ‘supplier’ and ‘recipient’ are the same, negating the existence of a taxable supply.”
4. Conclusion:
The ECJ’s judgment in the Adient case provides significant clarification on the interpretation of VAT fixed establishment rules within the EU. It firmly establishes that group affiliation and service contracts alone are insufficient to create a fixed establishment for VAT purposes. The focus must be on whether the service recipient possesses its own sufficient and distinct human and technical resources in the relevant member state to receive and use the services for its own business needs. The judgment also confirms the irrelevance of the subsequent supply of goods and their destination, and highlights the crucial distinction between the resources used to supply and receive services. This ruling is likely to have a significant impact on how multinational companies assess their VAT obligations and how tax authorities approach the determination of fixed establishments in cross-border scenarios involving related entities. It should lead to greater legal certainty and prevent the automatic creation of fixed establishments based solely on group relationships or contractual arrangements.
Frequently Asked Questions on VAT Fixed Establishments Based on the Adient Case
1. Can a company be considered to have a VAT fixed establishment in another EU member state simply because it belongs to the same group as a company located there or has a service contract with that company?
No. The Court of Justice of the European Union (CJEU) in the Adient case (C-533/22) clearly ruled that the mere fact that two companies belong to the same group or are bound by a service contract is not sufficient in itself to establish a fixed establishment for Value Added Tax (VAT) purposes. The existence of a fixed establishment requires more than just legal or contractual links.
2. What are the key characteristics that determine whether a company has a VAT fixed establishment in another member state?
A VAT fixed establishment is characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources that enables it to either receive and use services supplied to it for its own needs, or to supply services it provides. These resources must be distinct from those of the service provider. If the resources are only involved in preparatory or auxiliary activities, they do not constitute a fixed establishment.
3. In the Adient case, the Romanian tax authority argued that Adient DE had a fixed establishment in Romania due to its contract with Adient RO. Why did the Advocate General and the likely judgment disagree with this?
The Advocate General (AG) Kokott opined that a contract for the supply of services between two independent companies (even within the same group) does not automatically create a fixed establishment of the service recipient at the location of the service provider. This is because the service provider acts in its own name and economic interest as an independent contractor, not as a controlled part of the other company. For a fixed establishment to exist through a contract, the contract would need to be aimed at providing the necessary human and/or technical resources to allow the recipient to supply goods or services on site, similar to what a head office would do. A mere service contract for manufacturing does not typically meet this criterion.
4. How does the Adient judgment clarify the interpretation of Article 44 of the EU VAT Directive regarding the place of supply of services?
Article 44 states that the place of supply of services to a taxable person is generally where that person has established their business. However, if services are provided to a fixed establishment located elsewhere, the place of supply is where the fixed establishment is located. The Adient judgment reinforces that the ‘fixed establishment’ in this context must be a genuine establishment of the service recipient, characterised by its own sufficient and permanent resources, and not merely a related entity or a service provider under contract. The judgment clarifies that group affiliation or a service contract alone does not trigger the application of the fixed establishment rule under Article 44.
5. The goods manufactured by Adient RO were mostly sold outside Romania. Did this have any bearing on whether Adient DE had a fixed establishment in Romania for VAT purposes?
No. The Advocate General considered that the place where the goods manufactured as a result of the services are ultimately consumed or sold is irrelevant for determining whether a fixed establishment of the service recipient exists for the purpose of the initial manufacturing services. VAT does not tax actual consumption in this context, but rather the expense of purchasing the service. The place of supply of the manufacturing services is determined by the location of the recipient’s business or a genuine fixed establishment at the time the services are received, not by where the resulting goods are later sold.
6. What is the significance of the distinction between resources used to provide services and those used to receive them, as highlighted in the Adient case?
The AG pointed out that the same resources cannot be used simultaneously to both provide and receive the same services for a taxable transaction to occur. If the human and technical resources of the entity providing the services are essentially the same as those alleged to constitute the fixed establishment receiving the services, then, in essence, the ‘supplier’ and ‘recipient’ are the same, negating the existence of a taxable supply. A fixed establishment implies a distinct part of a taxable person, not merely the resources of a separate entity providing services to that person.
7. How do ‘preparatory and auxiliary activities’ relate to the concept of a VAT fixed establishment according to the Adient case and related regulations?
The Advocate General referenced Article 53(2) of the VAT Implementing Regulation, which indicates that if the resources of an establishment are only used for administrative support tasks such as accounting, invoicing, and debt collection, they are not regarded as being used for the fulfilment of the supply of goods or services. Similarly, the Adient case suggests that resources merely involved in preparatory or auxiliary operations necessary for a service do not, on their own, constitute a fixed establishment for VAT purposes. A fixed establishment needs to be capable of receiving and using the services for its own business needs beyond mere support functions.
8. What are the potential implications of the Adient judgment for multinational companies operating across EU member states, particularly those using subsidiaries or contract manufacturing arrangements?
The Adient judgment provides greater clarity and legal certainty by confirming that multinational companies cannot be automatically considered to have a VAT fixed establishment in a member state simply because they have a subsidiary or a contract manufacturing arrangement there. Businesses need to assess whether they have their own sufficient and distinct human and technical resources in that state that enable them to receive and use services for their own business needs, independently of the service provider. This ruling may help prevent tax authorities from incorrectly identifying fixed establishments based solely on group relationships or service agreements, potentially affecting VAT registration obligations and the application of the reverse charge mechanism.
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