Federal Finance Court: Reference to the European Court of Justice Regarding the Concept of a Permanent Establishment

Significance of a Fixed Establishment in Value-Added Tax

Businesses may provide or receive services through fixed establishments. If the fixed establishment is located in a Member State other than the one where the business is headquartered, the question of whether a fixed establishment is involved in the transaction determines the place of taxation and the party liable for the tax.

Case: Is a Sludge Drying Plant a Fixed Establishment?

The plaintiff is a municipality that engages in both economic and non-economic activities and holds a VAT ID number. It operated a wastewater treatment plant within Germany. The sewage sludge generated in the process was disposed of in a drying plant (hereinafter: “plant”) owned by A-KG, a company headquartered in Austria, which was installed on the property of the wastewater treatment plant.

The plant operated largely automatically. It was monitored and maintained remotely from A-KG’s headquarters. Necessary on-site work was performed by subcontractors.

Later, the contract with A-KG was replaced by a contract with C-GmbH, which was also headquartered in Austria. The contract specified that invoicing was to be made exclusive of value-added tax (VAT) and that the tax liability was to pass to the plaintiff.

The plaintiff dealt with both A-KG and C-GmbH using its VAT identification number. A-KG (C-GmbH) invoiced the plaintiff for its services on a net basis and indicated in the invoices that the plaintiff was liable for the tax. The plaintiff did not report the corresponding value-added tax. Following a special value-added tax audit, the tax office concluded that the plaintiff was liable for the tax on the services received and was not entitled to a tax credit for input tax. Accordingly, it demanded that the plaintiff pay the value-added tax.

The plaintiff contested this. It argued that the facility constituted a fixed establishment from which A-KG (C-GmbH) had provided its services. Accordingly, it contended that the tax debtor was not the plaintiff, but rather A-KG (C-GmbH). The court of first instance ruled in favor of the plaintiff, and the tax office filed an appeal.

Federal Fiscal Court Referral to the ECJ

The Federal Finance Court wishes to ask the European Court of Justice (ECJ) whether a facility involved in the provision of a service qualifies as a permanent establishment if the facility, located in Germany, is remotely controlled and monitored by an entrepreneur based in another Member State and, furthermore, subcontractors are engaged whose personnel work at the facility.

The Federal Fiscal Court has doubts regarding the following questions:

To what extent must the permanent establishment participate in the provision of the service?

The Federal Fiscal Court raises the question of whether the issue of a permanent establishment’s involvement in the service arises only if the permanent establishment provides the service in its entirety. In this case, while the facility autonomously carried out the drying of the sewage sludge, it did not handle the disposal of the sewage sludge, which was also part of the contract. If the CJEU were therefore to require that the service be provided entirely by the permanent establishment, the service providers (A-KG and C-GmbH) would be presumed not to be resident in Germany, and the plaintiff would be liable for the tax.

To what extent does a fixed establishment require staffing?

The Federal Fiscal Court questions whether the staffing requirement—which is a prerequisite for the existence of a fixed establishment—is met if A-KG (C-GmbH) does not employ its own staff on-site, but only staff from subcontractors are working there.

Conclusion: The ECJ ruling must be taken into account

As this case demonstrates, the correct VAT treatment of services requires the businesses involved to have precise knowledge of whether fixed establishments in other Member States are involved. Errors in this regard can be costly. Since many questions regarding when a fixed establishment exists remain unanswered, the ECJ ruling is likely to set a precedent and must therefore be taken into account. In proceedings based on comparable cases, it should be examined whether these cases should be kept open with reference to the pending proceedings.

Recipients of taxable services should be aware that either they or the service provider must pay the value-added tax. Accepting input invoices at net value without paying the VAT oneself or informing the invoice issuer of one’s own, differing legal opinion is considered borderline.

Federal Fiscal Court, referral to the ECJ dated May 7, 2026 – V R 12/24