An In-Depth Explanation of the Fixed Establishment Concept By Alexis - PowerPoint PPT Presentation

An In-Depth Explanation of the Fixed Establishment Concept By Alexis Tsielepis Managing Director, Chelco VAT Ltd Monday, 8 May 2017, St. Raphael Resort, Limassol Wednesday, 10 May 2017, Cleopatra Hotel, Nicosia Cyprus Fiduciary Association #CFAseminars2017

A LITTLE BACKGROUND

The legislation – FE  First mentioned as a concept in the Sixth Directive (1 Jan 1979 – 31 Dec 2006) – not defined  Continued to be mentioned in Council Directive 2006/112/EC of 28 November 2006 “The VAT Directive” (from 1 Jan 2007) – again not defined  ECJ guidance provided in various cases 4

The legislation – FE  First defined in Council Implementing Regulation (EU) No. 282/2011 of 15 March 2011 laying down implementing measures for the VAT Directive  Implementing Regulation has direct effect in all Member States  Followed the definition laid down by ECJ but did not include the important factor of ‘rational test’ 5

Fixed Establishment As per the legislation and ECJ jurisprudence

Fixed Establishment: ECJ: Foundations  Foundations laid down in 1985 in Berkholz (C-168/84, 4.7.1985)  Berkholz installed and maintained gaming machines on board ferryboats travelling between Germany and Denmark.  Maintenance was done by Berkholz’s employees on site but Berkholz did not maintain permanent staff on the ferryboat. 7

Fixed Establishment: ECJ: Foundations  The German tax authorities applied VAT to the entire turnover from the gaming machines deeming it to have arisen in Berkholz’s place of business in Germany.  Berkholz, on the other hand, argued that the machines constituted an FE and thus a percentage of their income was outside the scope of VAT. 8

Fixed Establishment: ECJ: Foundations  Berkholz (C-168/84, 4.7.1985)  “for an FE to exist, there should be a certain minimum size and that both the human and technical resources necessary for the provision of the services should be permanently present”  They thus concluded that the installation on board a sea- going ship of gaming machines, maintained intermittently, was not capable of constituting an FE.  ECJ never rejected in Berkholz the notion that an FE could not be found on a ship – therefore a ‘moving’ FE is possible . 9

Fixed Establishment: ECJ: Foundations  Berkholz definition of FE confirmed in Faaborg-Gelting Linien (C-231/94, 4.5.1996 )  Faaborg-Gelting Linien (hereinafter “FG Linien”), established in Denmark, supplied meals for consumption on board ferries running between the ports of Faaborg (Denmark) and Gelting (Germany). 10

Fixed Establishment: ECJ: Foundations  FG Linien considered the supply to be a supply of a service, taxable where the supplier was established. As such, it did not declare these in its German VAT declaration.  The German VAT authorities, on the other hand, regarded the supply to be one of goods, with the place of supply to be where the goods are at the time the supply takes place, and thus levying German VAT on the supplies that took place within the German VAT geographical scope 11

Fixed Establishment: ECJ: Foundations  The ECJ firstly concluded that restaurant services constituted a supply of services and not a supply of goods.  ECJ then referred to Berkholz pointing out that such a supply takes place where the supplier has established his business, unless there was an FE, with a certain minimum size and both human and technical resources, necessary for the provision of the service, were permanently present .  ECJ concluded that such an FE for FG Linien, could not exist on board the ferries. 12

Fixed Establishment: ECJ: Foundations  In arriving at this conclusion, the ECJ noted that the business establishment of the operator of the ship afforded an appropriate point of reference for the purposes of taxation.  ECJ stated that in examining which establishment was appropriate, a rational result for tax purposes should arise, that does not conflict with another Member State.  ‘Rational outcome’ was not explained and is very subjective: every tax authority issuing assessments believes that in doing so a rational result for tax purposes arises! 13

Fixed Establishment: ECJ: Foundations  Definition expanded 12 years after Berkholz in ARO Lease (C-190/95, 17.7.1997)  ARO Lease BV established in Netherlands  It leased around 6,000 passenger cars in the Netherlands and around 800 in Belgium.  The agreements were drawn up in the ARO’s offices in the Netherlands. 14

Fixed Establishment: ECJ: Foundations  In Belgium, ARO worked through self-employed commission agents.  Belgian customers (corporate and individuals) chose a car from a dealer,  ARO purchases the car from the dealer and leases it to the customer, typically on a long-term basis,  ARO insures the cars against repairs and assistance in case of damage.  ARO did not maintain an office in Belgium, but kept the fleet of cars stored in dealerships, where these were not leased out. 15

Fixed Establishment: ECJ: Foundations  The Belgium VAT authorities considered that ARO maintained an FE in Belgium, through its fleet of cars, wanting to assess the Belgium car leasing activities to VAT. ARO was paying VAT in the Netherlands. 16

Fixed Establishment: ECJ: Foundations  The ECJ referred to Berkholz , stating that for an FE to exist, a minimum degree of stability derived from the permanent presence of both the human and technical resources necessary for the provision of the services was required.  It ruled that ARO did not have an FE in Belgium as it possessed in Belgium neither its own staff, nor a structure with a sufficient degree of permanence to provide a framework in which agreements could be drawn up or management decisions taken, thus enabling the services to be supplied on an independent basis. 17

Fixed Establishment: ECJ: Foundations  The ECJ also noted that ancillary factors, such as the Belgium customers choosing their own cars from Belgium dealers, had no bearing on the place of establishment of the supplier of the service. 18

Fixed Establishment: ECJ: Foundations  The same conclusion arose in Lease Plan Luxembourg (C-390/96) , which was based on very similar facts.  The ECJ firstly pointed out that the place where the supplier had established his business was the primary point of reference to determine the place of supply, unless this “ does not lead to a rational result for tax purposes or creates a conflict with another Member State ”. 19

Fixed Establishment: ECJ: Foundations  The ECJ further explained that reference to an establishment other than the main place of business would only be possible if that establishment, meaning an FE, possessed a sufficient degree of permanence and a structure adequate, in terms of human and technical resources, to supply the services in question on an independent basis, which Lease Plan did not possess in Belgium.  The ECJ also concluded that the mere registration of vehicles in a Member State was not an indication of an FE in that Member State. 20

Fixed Establishment Definition as per the Implementing Regulation

Definition as per Implementing Regulation (Article 11)  the FE requires that it: I. has permanence; and II. has human resources; and III. has technical resources; and IV. either receives and uses services (the receiving FE); and / or V. supplies services (the supplying FE).  (i) referred to as the objective requirement  (ii) and (iii) referred to as the subjective elements  (iv) and (v) referred to as the functional elements 22

Fixed Establishment Analysis of the Definition as per the Implementing Regulation

Fixed Establishment “Permanence”

Fixed Establishment: Permanence  The ECJ has not interpreted the term ‘permanence’  ‘sufficient degree of permanence’ should be viewed mainly as permanence in terms of time.  Examining permanence in terms of geography may not be a suitable test when applied to a consumption tax, given that a geographically movable FE is possible (Berkholz and Faaborg-Gelting Linien where a ferry boat could constitute an FE)  The time period should not be attached to the FE itself per se, but more to the activities that the FE actually undertakes. 25

Fixed Establishment “Human and Technical Resources”

Supplying FE: Human and Technical Resources  In Berkholz, the fundamental conclusion of the ECJ was that in order to have an FE, human resources (i.e. personnel) are required: the gaming machines did not constitute an FE. Here, arguably Berkholz did have technical resources, being the machines themselves, but no permanent human resources.  The court looks at the activities of the business and then analyses what technical and human resources these activities would require.  From there, the examination is to locate the establishment, where the resources used, is found. 27