Fixed Establishments In The EU – The Adient Case:

In an update to our recent news story, the European Court of Justice (ECJ or the Court) has published its decision in the highly anticipated case concerning fixed establishments C-533/22 – Adient. The Court has decided that a fixed establishment is not created when one business that is part of a corporate group provides goods and services to another business in the country of establishment of the first.

What is the Adient case about?

Adient is a group of companies in the automotive industry with the parent entity in Germany – Adient Ltd & Co. KG (Adient Germany) – and one of its subsidiaries in Romania – Adient Automotive Romania SRL (Adient Romania).

The Romanian subsidiary operates a manufacturing facility for upholstery. Adient Germany buys raw materials, transports them to Romania where it goes through a manufacturing and assembly processes provided by Adient Romania. The finished product is then shipped to other countries. Aside from the manufacturing services, Adient Romania also provides a number of other ancillary and administrative services and charges a fee to Adient Germany.

Adient Romania had been audited by the Romanian Tax Authorities (RTA) and upon reviewing the agreements between the parties the RTA concluded that Adient Germany had a fixed establishment in Romania as a result of using Adient Romania’s human and technical resources in order to undertake taxable supplies in Romania.

As a result of having a fixed establishment in Romania the RTA concluded that Romanian VAT should have been charged on the services provided by Adient Romania along with penalties and interest. Of course, this conclusion was challenged by the tax payer and the case was eventually referred to the ECJ.

The Court’s decision

The Court decided a fixed establishment should not be triggered by the use of Adient Romania’s resources by Adient Germany. The Court referred to previous case law on this matter that supported this view with an important role being played by another recent case from Belgium (C-232/22 Cabot Plastics) as one in Romania that dealt with a similar set up in terms of contractual arrangements (C-333/20 Berlin Chemie A. Menarini SRL).

The main points made by the Court were:

• the same human and technical resources of the subsidiary cannot be used to both provide and receive services;
• a fixed establishment cannot be created solely because two companies belong to the same group or the companies are bound by a contract for the provision of services. This is the case even if the subsidiary exclusively performs services to the other company and has access to its accounting and stock keeping systems, and
• Services of an ancillary/administrative nature are not relevant for the purposes of creating a fixed establishment.

Impact on businesses issue with fixed establishments

We outlined in our previous newsletter the issue with fixed establishments and why this has been such a contentious issue for a number of years.

In our view the current decision should provide more certainty on the matter, and limit the number of enquiries from EU tax authorities on this point. However, the ECJ has in the past issued judgement that is supportive of the view that a fixed establishment can be triggered by a business using third party resources. This means it is possible tax authorities in the EU may continue to pursue this point in the future as well.

Therefore, any business (regardless of location) that works closely with other group companies or third parties in the EU should check whether their contractual arrangement expose them to the risk of a fixed establishment being generated. Pre-empting such issues should be a high priority as the additional costs (fines, penalties and interest) can be quite significant.

If you have any questions around this case or believe you might fall under the fixed establishment rules in the EU do reach out to us.