Regional Administrative Court in Wrocław asks CJEU about fixed establishment
The notion of fixed establishment (hereinafter: FE) is of key significance among others from the perspective of proper determination of a place of supply of services for the purpose of VAT. Because of quite enigmatic definition of this term, all the time new disputes are arising in this regard between taxable persons and tax authorities, which more and more often attribute FE in Poland to foreign entities.
In the course of hearing one of such cases, the Regional Administrative Court in Wrocław, in its decision of 6 June 2018 referred to the Court of Justice of the European Union two requests for a preliminary ruling:
- May the existence of a permanent establishment be derived from the fact that a company established outside the European Union has a subsidiary in Poland?
- Is a third party obligated to analyse the contractual relations between a company established outside the European Union and its subsidiary for the purpose of determination whether a permanent establishment in Poland is in place?
Determination whether a foreign contracting party has a permanent establishment in Poland is crucial for a proper settlement of VAT. In accordance with Article 28b paragraph 2 of the VAT Act, if services are supplied to a fixed establishment, decisive for a place of supply of services is not the registered office but that fixed establishment. In consequence of finding that a foreign company has a fixed establishment in Poland, Polish taxable persons supplying services to them will not be able to take advantage of a reverse charge mechanism, which in the end results in the obligation to apply a domestic rate and possible tax arrears with respect to already effected transactions. Similarly, if foreign contracting parties making supplies of goods have a fixed establishment in Poland, it is not possible to apply a reverse charge mechanism, which results in the application of a proper domestic rate of VAT (Article 17 paragraph 1 of the VAT Act).
According to a definition included in Article 11 of the Council Implementing Regulation (EU) No 282/2011, a fixed establishment means any establishment, other than the place of establishment of a taxable business, 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.
This definition does not clear all doubts in terms of interpretation. Tax authorities tend to interpret the definition of FE in a broad sense. For example, in the binding ruling of 6 February 2018 (no. 0114-KDIP1-2.4012.683.2017.2.MC), Director of the National Fiscal Information found that a foreign company selling goods in Poland with assistance of its subsidiary had a fixed establishment in Poland. It was of no relevance that decisions relating to the sales model were taken in Germany, and the company did not even have a warehouse in Poland.
Similar position was taken by Director of the National Fiscal Information in the binding ruling of 5 February 2018 (no. 0114-KDIP1-2.4012.643.2017.2.JŻ) in the case involving a Norwegian company which appointed a Polish contracting party to produce barges from entrusted construction elements. The Norwegian company transported them on its own to Scandinavia, where the most important manufacturing decisions were taken. The authority emphasised that the business of the company had been carried on in Poland already for several years, representatives of the Norwegian company controlled the production, and its employees had access to the manufacturer’s shipping yard, and hence a fixed establishment had been created in Poland.
The analysis of the issue by the CJEU will definitely help resolve disputes arising in this regard. Noticing unfavourable interpretation of the provisions by tax authorities, in order to mitigate a tax risk, if any, it may be worth considering now an application for an individual binding ruling.
Anna Skórska, Tax Consultant, ATA Tax Sp. z o.o.
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