Establishment of a permanent establishment abroad by a group company?

Case: Group company in Romania as a permanent establishment of the German group company?

The case concerns two independent group companies, one based in Germany (D) and the other in Romania (R). R provides services to D. These consist of the processing of raw materials provided by D and support in the sale of the finished products. D delivers these to its customers from Romania. R assumed that the services are taxable at D's registered office, i.e. in Germany, and are subject to the reverse charge procedure. Accordingly, R invoiced the services without VAT. The Romanian tax authorities took a different view. It assumed that the recipient of the services was a permanent establishment of D in Romania. This consisted of two branches of R. Accordingly, it demanded VAT from R. R appealed against this. R filed an action against this. The court hearing the action referred the case to the European Court of Justice (ECJ).

ECJ sets out principles to be observed

The ECJ ruled against the existence of a permanent establishment of D in Romania. It points out the following principles:

If a company receives processing services in another Member State, it does not have a fixed establishment in the other Member State merely because both companies belong to the same group of companies or there is a service contract between them. For the purposes of determining the place of supply of services, it is irrelevant that an undertaking which receives processing services from an undertaking established in another Member State has a structure in that other Member State with which it supplies its customers from there. In order to establish a fixed establishment, the personnel and technical equipment must be different from that with which the services are provided to the company in the other Member State. Auxiliary activities or activities of a preparatory nature do not constitute a permanent establishment.

Significance of the issue

Some will ask themselves: What is the problem? Because if the German company is entitled to deduct input VAT, this results in a zero-sum game for the group if the Romanian company has to recalculate VAT. However, this overlooks the fact that the additional VAT claim can result in penalties and interest for the Romanian company, which are usually considerable, as the turnover in such group organisations is often quite high. In addition, the German group company is obliged to register and declare itself in Romania - with the associated costs and other consequential problems.

Consequences

This is not the first judgement of the ECJ on this topic. This time, the ECJ's statements are pleasingly clear and unambiguous. For groups that have their goods processed in another member state by a group company, this means increased legal certainty. Existing arrangements should be reviewed in light of the ECJ's statements.

European Court of Justice, judgement of 13.06.2024 - C-533/22