Fixed Establishments In The EU – The AG’s Opinion In The Adient Case:


One of the most anticipated cases currently pending with the European Court of Justice (ECJ or the Court) is C-533/22 – Adient. The case revolves around the concept of fixed establishments and is the latest development in a series of cases on the matter. We have explained below why this case is important and the impact it might have on businesses trading in the EU.

 

The issue with fixed establishments

 

A business establishment is where the day-to-day decisions concerning the management of the business are made.  This is generally regarded as where the company’s head office is and where the directors hold board meetings.  A fixed establishment is an establishment other than a business establishment and usually is regarded as where activities of the business can take place with a sufficient degree of permanence (although see below for more on this). This can be outside of the country where its business establishment is located. For example, a UK business can have its business establishment (head office) in the UK but fixed establishments in other countries such as the Netherlands, France, Germany or any other jurisdiction where it undertakes business activity in certain circumstances.

 

For VAT purposes, in order to have a fixed establishment in another country a business must have sufficient human and technical resources to receive or carry out supplies in that other country. A UK business that has permanent employees in France which are being used to provide services to French customers is likely to be seen as a fixed establishment of the UK business.

 

Typically, this concept only applies where the same legal entity trades in a different jurisdiction and does not usually apply if a separate business (e.g. a subsidiary) is used to provide goods or services. If, for example, the French subsidiary of a UK business provides services or sells goods in France using its own employees and technical resources it would typically be seen as a separate taxable person to the UK parent entity, and not as a fixed establishment of the UK business in France. As a side note, we use the terms “parent entity” and “subsidiary” to describe the relationship between the parties because this is the most common setup we’ve seen, however from a VAT perspective it does not matter if the two entities are parent and subsidiary in terms of shareholding structure.

 

However, in the past few years multiple tax authorities in the EU seem to have taken the view that even separate legal entities can become fixed establishments in cases where the parent entity and the subsidiary work very closely.  This issue has been raised with the European Court of Justice a few times and the Adient case is the most recent development in this series of cases.

 

As you can imagine, a subsidiary crystalising a fixed establishment for the parent entity would be a huge issue as it would open the door to the parent entity having VAT obligations in that country despite it also operating via another, separate company.

 

But why would a fix establishment be a problem? Surely, if VAT should have been charged by one party, then this would give also mean the other party has a right to recover. While this is true, the fines, penalties and interest applied by tax authorities for late payment or reporting of the VAT can be quite significant.

 

What is the Adient case about?

 

Adient is a group of companies that operates in the automative 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 it 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.

 

What is the AG’s view?

 

The Advocate General (AG) is a specialist called by the European Court of Justice to provide their view on very complex and technical matters. Their opinion however is not binding, which means it is up to the European Court of Justice to decide whether they will take the technical advice of the AG into account or not.

 

In this case, the AG’s opinion is that a fixed establishment should not be triggered by the use of Adient Romania’s resources by Adient Germany.

 

The AG pointed out previous case law on this matter would support this view and, in this respect, it is worth mentioning a very similar situation had been reviewed by the Court in another recent case from Belgium (C-232/22 Cabot Plastics). Prior to this, another case also from Romania dealt with a similar set up in terms of contractual arrangements (C-333/20 Berlin Chemie A. Menarini SRL).

 

In both instances the ECJ concluded no fixed establishment was created, but this was based on particular facts of the two cases. The Court also admitted it would be possible in some circumstances for a business to have a fixed establishment via a third party’s human and technical resources, which is exactly the question raised by the Adient case.

 

The AG has therefore tried to address the issue by using some of the arguments from the previous cases (e.g. that the same human and technical resources of the subsidiary cannot be used to both provide and receive services) but also seems to introduce new concepts. For example, the AG believes that for a fixed establishment to be created, the contract between the head office and the subsidiary has to explicitly reference the provision of human and technical resources and the end result has to be that the fixed establishment is taking over the functions of the parent entity.

 

What’s next?

 

Now that the AG has provided its view, the Court will need to reach a decision which should be expected in the next couple of months. As mentioned above, it is up to the Court to decide whether they want to use any of the technical points mentioned by the AG in its opinion. In the past, the Court has ignored opinions from this AG in particular, and therefore might do so again.  Although this is part of the reason why the matter has now become so complicated from a VAT technical perspective.

 

Who will be impacted by this case?

 

Any business (regardless of location) that works closely with other group companies or third parties in the EU should check whether their contractual arrangement exposes 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.

 

While we await with interest the outcome of the Adient case, tax authorities are likely to continue challenging businesses that work closely with other group companies as existing case law already allows them to take this view.

 

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.