Definition of fixed establishment
The notion of “fixed establishment” is one of the most important concepts in the EU’s VAT system. The interpretation of this term may be decisive in establishing the place of supply of given services as well as the possibility of applying the reverse charge mechanism.
The definition of fixed establishment developed primarily through case law of the Court of Justice. Later it was introduced into EU legislation.
The legal definition of fixed establishment was not created until 1 July 2011. Under Council Implementing Regulation No 282/2011 of 15 March 2011, a fixed establishment means any establishment other than the place of establishment of a business, characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to provide the services which that fixed establishment supplies.
In light of this definition, the following aspects determine whether there is a fixed establishment:
- The time over which the establishment is maintained
- Technical resources
- Human resources
- Ability to receive and use services.
New interpretation of fixed establishment
Until recently, these criteria were deemed fulfilled only in the case of foreign entities with their own infrastructure and personnel; only foreign companies possessing technical resources (such as machinery and warehousing) and staff hired under employment contracts were regarded as taxpayers with a fixed establishment in a given country.
That interpretation has changed. In the judgment of 16 October 2014 in C-605/12 Welmory Sp. z o.o., the Court of Justice expanded the scope according to which a company may be viewed as having a fixed establishment in another member state. The CJEU held that for a fixed establishment to exist, a company must have a sufficient degree of permanence and human and technical resources to allow it to receive and use the services for its economic activities. While not explicitly stated, the judgment implies that the resources need not belong to the company in order to create a fixed establishment of that company (i.e. a fixed establishment may be created by a third party’s resources). However, the foreign entity should have control over the resources.
The same position was presented in a preliminary ruling issued by the Warsaw Administrative Court on 15 June 2015 (Case III SA/Wa 3332/14) following Welmory. More and more Polish courts are issuing similar rulings citing Welmory.
There is a notable change underway in the approach of Polish tax authorities and administrative courts to the concept of fixed establishment. This may result in an increasing number of disputes on this subject.
It can be expected that the Polish tax authorities and administrative courts will more often find that foreign taxpayers with their registered place of business outside Poland actually have a fixed establishment in Poland.
The most important consequence of the foreign buyer having a fixed establishment in the same member state as the supplier is that for the place-of-supply rules, the service is taxable in the member state of the fixed establishment. Other consequences for foreign entities could involve the requirement to pay Polish VAT on the provision of services or supply of goods to Polish taxpayers. The change in the manner of VAT settlement will apply to services rendered by Polish companies to foreign entities as well. This is because when a service recipient has a fixed establishment in Poland, a Polish service provider will have to collect the VAT on the supply of services (the reverse charge mechanism will not be applicable in that case).
Therefore, both foreign suppliers and Polish companies with counterparties abroad should examine in each case if the structure the foreign entity has in Poland is sufficient for it to be regarded a fixed establishment.
Piotr Perechowski, assistant tax specialist