Summary of AG Opinion in ECJ C-533/22 (Adient) – The same means cannot be used at the same time to provide and receive the same services

On January 30, 2024, the ECJ issued the AG Opinion in the case ECJ C-533/22 (Adient).

The recent increase in requests for preliminary rulings on the criteria for determining the existence of a fixed establishment for VAT purposes is remarkable. This trend, particularly regarding whether a controlled or group company can be considered a fixed establishment, has led to a Romanian court seeking clarification on whether a group company in Romania can also be the fixed establishment of its contract partner in Germany. This has implications for the place of service provision and tax implications. The Court has the opportunity to provide clarity on when an independent company can be considered the fixed establishment of its contract partner, improving legal certainty for tax authorities and taxable persons.

Facts

The main company in Romania is Adient DE, a German company belonging to the Adient group, a global supplier to the automotive industry.
Adient DE entered into a contract with Adient RO in Romania to provide manufacturing and assembly services for car seat covers.
Adient DE is registered for VAT purposes in Romania and uses its German VAT number for services rendered by Adient RO.
The tax authority in Romania concluded that Adient RO should collect VAT on its services to Adient DE, and also found that Adient DE had a fixed establishment in Romania.
Adient DE contested the decision, arguing that it does not have a fixed establishment in Romania. The case is pending before the court.

Questions

The questions pertain to the interpretation of Article 44 of the VAT Directive and Articles 10 and 11 of the VAT Implementing Regulation.
They inquire about
- the classification of a resident legal person as a fixed establishment of a non-resident entity based on group affiliation
- the determination of a fixed establishment based solely on services supplied to a non-resident entity, the existence of a fixed establishment supplying only goods and not services
- the interpretation of manufacturing services provided by human and technical resources of a non-resident legal person
- the determination of the place of supply of services
- the relevance of activities linked to the treatment of goods in determining the existence of a fixed establishment
- the connection between the place of supply of manufacturing services and the place of final consumption
- whether there is still a supply of services if the technical and human resources of the fixed establishment receiving the services are virtually the same as those of the service provider.

Argumentation AG

The referring court has referred eight questions for a preliminary ruling, which can be divided into three groups.

The first question seeks to determine if a taxable transaction occurs when one group company’s facilities and human resources are used both to provide and receive a service.
The next set of questions asks how a fixed establishment to be regarded as the recipient of a service is defined within a group, and
the last set of questions raises concerns about the application of VAT Directive to establish the residency of a company in Romania.

Taxable service of a taxable person (eighth question)

This passage addresses the eighth question regarding the existence of a taxable transaction when facilities and human resources of one group company (Adient RO) claimed to be a fixed establishment of another group company (Adient DE) are used both to provide and receive the same service. Key points include:

VAT as a Consumption Tax: VAT is described as a general tax on consumption, focusing on the expenditure made by the recipient of a consumer good, implying the involvement of at least two persons in a taxable transaction.
Requirement for Two Persons in a Taxable Transaction: The passage emphasizes that a taxable transaction, as defined in the VAT Directive, necessitates the involvement of two persons, at least one of whom must be a taxable person.
Article 11 of the VAT Directive: Article 11 allows Member States, under specific conditions, to treat two or more persons as a single taxable person, creating ‘organizational neutrality’ to avoid transactions between these persons.
Eighth Question and Potential Relocation of Place of Supply: The eighth question is seen as possibly related to Member States attempting to relocate the place of supply of services rendered by a subsidiary to a parent or group company outside their territory. The qualification of the subsidiary as a fixed establishment precludes a finding of a taxable transaction.
Internal Transaction and Non-taxable Nature: If services by Adient RO are performed through a branch that is simultaneously a fixed establishment of Adient DE, it results in an internal transaction within the same taxable person. This non-taxable internal transaction excludes the need for considering the place of supply, tax liability, and tax debt.
Interim Conclusion on Romanian VAT: Even if a fixed establishment of Adient DE exists, no Romanian VAT is deemed payable due to the absence of a taxable transaction. The service provider and recipient would be the same person.
Relevance of Following Questions: Although no VAT is payable, subsequent questions remain pertinent for determining a potential obligation to register Adient DE in Romania.

A group company as a fixed establishment of another group company?

Irrelevance of connections recognised under company law
- This passage discusses a legal analysis related to the establishment of a fixed establishment for VAT purposes under Directive 2006/112/EC. The key points include:
  - Corporate Group Membership Not Sufficient: The text asserts that relying solely on connections recognized under company law, such as membership in the same corporate group, is insufficient to establish a fixed establishment.
  - Distinct Taxable Persons: It clarifies that two group companies are distinct taxable persons under the VAT Directive, and even if closely bound, they do not constitute a single taxable person.
  - Criteria for Fixed Establishment: The text points out that the criteria for a fixed establishment, as outlined in Article 44 of the VAT Directive and further detailed in Article 11(1) of the VAT Implementing Regulation, go beyond company-law considerations. Criteria include permanence of establishment and a structure capable of receiving and using services.
  - DFDS Decision Not Automatically Applicable: The decision in DFDS, which involved tour operators and a special VAT regime, is noted as not automatically transferable to other situations. It emphasizes the economic aspect of who provides rather than receives services.
  - Legal Certainty and Economic Reality: The text underscores the importance of legal certainty and economic reality in determining the classification of a fixed establishment. It states that legal status alone does not determine fixed establishment status.
  - Ambiguity in Dong Yang Decision: The text criticizes the ambiguity in the Dong Yang decision, which suggested that a subsidiary held for conducting economic activity may constitute a fixed establishment. It argues that such an assertion lacks clarity and undermines legal certainty.
  - Recent Court Statements: The passage references recent court statements emphasizing that a fixed establishment classification cannot depend solely on the legal status of the entity, and having a subsidiary in a Member State does not automatically mean having a fixed establishment there.
  - Objective Criteria for Legal Certainty: The passage suggests that the place where the taxable person has established their business, as a primary point of reference, provides an objective, simple, and practical criterion for legal certainty, making it easier to verify than the existence of a fixed establishment.
  - Conclusion on the First Question: The text concludes that a connection recognized under company law, even within a corporate group, cannot constitute a fixed establishment for a different independent company.

Other criteria for a fixed establishment in the form of a group company?
- This passage addresses the possibility of a company (B) providing technical and human resources to another company (A) in a manner that constitutes a fixed establishment for company A. The key points include:
  - Distinct Fixed Establishment: While the previous conclusion rules out a fixed establishment when the same means are used to provide and receive services within the same company, it does not exclude the possibility of one company (B) providing resources that constitute a fixed establishment for a different company (A).
  - Quality and Quantity of Resources as Determinative: The determinative factor for the existence of a fixed establishment is whether the provided resources meet a sufficient quality and quantity, rather than whether the companies involved are part of the same group.
  - Contract for Services vs. Provision of Resources: A contract for the supply of services between two group companies is distinguished from a contract for the provision of resources. The service provider in a service contract fulfills obligations in their own name and economic interests, not as a controlled component of the other contracting party.
  - Court’s Clarification on Resource Usage: The Court has clarified that a legal person, even with only one customer, is assumed to use technical and human resources for its own needs.
  - No Taxable Transaction for Fixed Establishment: The passage concludes that a contract for the supply of services does not, in principle, imply that the supplier of the service is effecting a taxable transaction in favor of a fixed establishment of the recipient of the services. This addresses the second question raised.

Irrelevance of whether the recipient of the services is supplying services or ‘only’ effecting deliveries and the place where the goods are ultimately consumed
- This passage addresses the third and seventh questions referred for a preliminary ruling related to the determination of a fixed establishment for VAT purposes. Key points include:
  - Nature of Output Transactions Irrelevant: The third question suggests that the distinction between the group recipient (Adient DE) providing services or delivering goods could be crucial in determining a fixed establishment. However, the passage argues that there is no apparent reason for such a distinction. The nature of output transactions (goods or services) of Adient DE is deemed completely independent of the determination of the place of supply of services rendered by Adient RO.
  - Relevance of Specific Consumption Location: The seventh question aims to understand the relevance of the place of specific consumption of goods manufactured in Romania for establishing a fixed establishment. The passage clarifies that the place where goods are ultimately ‘consumed’ is irrelevant for VAT law. VAT taxes the financial expense of purchasing the consumer good, and the place of performance of the last transaction in a chain of transactions determines VAT allocation to a Member State.
  - Conclusion on Questions: In summary, the passage concludes that the distinctions related to the nature of output transactions by the group recipient and the place of specific consumption of goods in a chain of services are irrelevant for determining the place of taxation and, by extension, the existence of a fixed establishment for VAT purposes.

Is there an exception based on the prohibition against abusive practices?
- This passage addresses the possibility of the contractual relations between Adient DE and Adient RO being considered an abusive practice for VAT purposes. Key points include:
  - Abusive Practice Consideration: The passage notes that, in exceptional cases, a different position could be taken if the chosen contractual relations amount to an abusive practice.
  - Absence of Abusive Practice in the Present Case: The text argues that, in the present case, Adient DE is not engaged in any abusive practice related to contracting processing assignments. The complex service agreement is not just on paper but is appropriately performed. Commercial realities do not suggest otherwise, even if Adient RO assists in selling goods to other companies.
  - Economic Perspective and Ownership: Adient DE remains the contract partner, owner of raw materials, and deliverer of goods to customers, even if Adient RO is involved in assisting sales. The use of the internal group accounting system does not impact this assessment.
  - Lack of Evidence of Tax-Saving Scheme: Unlike the situation in the DFDS judgment, there is no evidence of a tax-saving scheme in the contractual agreement. Even if the place of supply were in Romania, any Romanian VAT would have to be neutralized by input tax deduction, and there is no indication of an artificial tax arrangement.
  - Baseless Accusation of Misuse of VAT Identification Number: The accusation of misuse of the VAT identification number by the Romanian tax authority is deemed baseless. The German VAT identification number is used to prove establishment in Germany, and its use does not constitute or serve as proof of a fixed establishment in Romania.
- In summary, the passage argues that, in the absence of evidence of abusive practices or tax-saving schemes, the chosen contractual relations between Adient DE and Adient RO do not warrant the accusation of misuse of the VAT identification number or a finding of an abusive practice.

Interim conclusion
- This passage underscores the principle that an independent company cannot, in principle, be considered a fixed establishment of another independent company simultaneously. It clarifies that even a complex contract for the supply of services does not inherently imply that the supplier is executing a taxable transaction in favor of a fixed establishment of the service recipient established based on that contract. The determination of the place of supply for such services, according to the passage, is not influenced by the nature of the output transactions (goods or services) of the service recipient or the location of the ‘consumption’ of individual manufacturing services.

The place of establishment of a taxable person

- This passage discusses the determination of when a taxable person with a fixed establishment in a Member State is not considered established in that Member State. Key points include:
  - Article 192a of the VAT Directive: This article stipulates that the mere existence of a fixed establishment is not sufficient for a taxable person to be considered established within a Member State. The fixed establishment must also be involved in transactions within that Member State.
  - Criteria for Determining Place of Supply: The most appropriate point of reference for determining the place of supply of services is where the taxable person has established their business. This criterion is considered objective, simple, and practical, offering legal certainty and ease of verification.
  - Role of Fixed Establishment: A fixed establishment must have a sufficient degree of permanence and a suitable structure with human and technical resources to receive and use services for its own needs. The fixed establishment should perform functions comparable to the head office.
  - Relevance of Human and Technical Resources: The question of whether a fixed establishment must have human and technical resources simultaneously is deemed of secondary importance. The critical factor is whether the fixed establishment, in specific situations, takes the place of the head office and performs comparable functions.
  - Contractual References to Auxiliary Support Services: The presence of auxiliary support services in a contract is considered immaterial for determining the existence of a fixed establishment. The crucial aspect is whether the contract enables the recipient to create a fixed establishment on-site, providing similar services to those at the head office.
  - Contract Object and Performance: If a fixed establishment is formed for VAT purposes only when the head office is substituted to a certain extent in another Member State, this must be part of the contract’s subject matter. The contract should involve providing human and/or technical resources necessary for the recipient to create a fixed establishment on-site.
  - Independent Actions of Entities: In the specific case discussed, Adient DE and Adient RO act independently in their respective areas without the head office of Adient DE being substituted for due to contractual provisions. The contract relates to services performed by Adient RO in its own name and at its own risk for products of Adient DE.

AG Opinion

1) There could not be a taxable transaction under Article 2(1)(c) of Directive 2006/112/EC in the present case, even if a fixed establishment existed, because the same means cannot be used at the same time to provide and receive the same services.
2) An independent group company in another Member State is not to be regarded as a fixed establishment of a different group company based solely on a link recognized under company law. Even a complex contract for the supply of services does not necessarily mean that the supplier is effecting a taxable transaction in favor of a fixed establishment of the service recipient. The place of supply of services depends neither on the nature of the output transactions of the service recipient nor on the place of consumption of the specific manufacturing services.
3) A fixed establishment exists only if it substitutes for a head office located within the territory of another Member State. A contract entered into with a supplier of services can constitute a fixed establishment only if it is aimed at provision of the human and/or technical resources necessary to ensure that the recipient can supply goods or services on site that are similar to those provided at a head office.

Summary of AG Opinion in ECJ C-533/22 (Adient) – The same means cannot be used at the same time to provide and receive the same services

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