Place of supply and importance of VAT ‘Establishments’
Indirect Tax Matters August 2020
In VAT terms we speak about both a ‘Business Establishment’ (“BE”) and a ‘Fixed Establishment’ (“FE”) which could often be described as a head office and a branch respectively. The PE is taken to be the place where the functions of the business’s central administration are carried out. The regulations provide that ‘account shall be taken of the place where essential decisions concerning the general management of the business are taken, the place where the registered office is located and the place where management meets’. However, they go on to provide that ‘the place where essential decisions… are taken shall take precedence’ [IR 10].
In practice what this usually means is that the place where the board meets is the primary indicator of the location of the BE.
An FE on the other hand means ‘any establishment… characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs’ and ‘to enable it to provide the services which it supplies’ [IR 11].
The concept of establishment is also defined for Customs purposes which uses similar language. Article 5 UCC states a ‘permanent establishment means a fixed place of business, where both the necessary human and technical resources are permanently present and through which a person’s customs-related operations are wholly or partly carried out’.
The location of a BE or FE is important in determining the place of supply of services for VAT purposes. Most cross-border services supplied to businesses are now taxable on a reverse-charge basis meaning that it is the recipient rather than the supplier who accounts for the VAT on these [D44]. Therefore, in order to correctly account for the receipt of international services the place of receipt must be identified. Exceptionally certain services such as work on immovable goods, hotels, meals, short-term car-hire and events (concerts, classes) are taxable where the services are physically supplied.
Where the recipient has full VAT recovery their obligation usually just extends to reporting the purchase of the service in their VAT return. However, for those engaged in VAT exempt or out-of-scope services, the VAT arising on the receipt of international services will generally result in an irrecoverable VAT liability for the recipient.
The supplier also has obligations. They must report cross-border services to their EU business customers on VIES and for that they will require a VAT number from the customer.
Where a customer has more than one establishment, the supply will be taxable ‘at the place of establishment receiving that service and using it for its own needs’ [IR21]. In order to identify the FE to which a service is supplied the supplier should ‘examine the nature and use of the service provided…[and] shall pay particular attention to… the contract, the order form and the VAT identification number…’. [IR22]. This will then allow the supplier to zero-rate the service. In the absence of this information the supplier could find that domestic VAT is due on the services.
The fact of having a VAT number is not of itself sufficient to prove the existence of a fixed establishment [IR11.3]. For example, many companies which hold stocks in a Member State would require them to have a VAT number in that State but they would not necessarily have an establishment in that State.
It should also be noted that an establishment in a Member State may be disregarded if it does not intervene in the supply of services or goods in such Member State [D192a].
In a recent European Court of Justice case [Dong Yang C-547/18] the Polish authorities sought VAT from a Korean Company on the basis that its subsidiary in Poland constituted an establishment of the parent company. While ultimately this proved to be an unsuccessful attempt on the part of a tax authority to assess VAT, it nevertheless illustrates the importance of ensuring that fixed establishments have sufficient substance and independence in terms of management structures etc. to qualify as establishments in their own right. It also demonstrates the VAT risk for suppliers since they are obliged to identify the place of establishment of the customer which permits them to zero-rate a cross-border supply.
Finally, we would mention that only persons established in the customs territory of the EU may act as exporter of record for the purposes of an export declaration. This means that they must have either their registered office, central headquarters or a permanent establishment within the EU. Otherwise they will be required to designate an agent or other party to act for them in relation to the export [DA 1(19)]. The penalties for non-compliant export declarations can be very onerous.
If you wish to discuss or obtain more information on the VAT or Customs aspects outlined please contact Ted Holohan or any other member of the Indirect Tax Team.