Affiliated company as fixed establishment - ECJ ruling C-533/22 "SC Adient" of 13 June 2024

Facts of the case

The German company SC Adient Ltd & Co KG (Adient DE) shipped upholstery supplies for car seats from Germany to Romania for the production of car seat covers by the Romanian group company Adient Automotive România SRL (Adient RO).  Adient DE then shipped the finished car seat covers from Romania to customers worldwide.  In addition to the production, Adient RO provided Adient DE with various auxiliary services consisting of the delivery acceptance, storage, inspection, and management of the raw materials and the storage of the finished products. Adient DE used its German VAT ID number for the services Adient RO provided to it.  Adient DE used its Romanian VAT ID number for the intra-Community acquisitions and the shipments of the finished products.

The service invoices Adient RO sent to Adient DE did not include VAT but did include a reference to the reverse charge procedure. This was based on its view that the place of supply is the registered office of Adient DE's economic activity in Germany in accordance with Art. 44 of the VAT Directive.The Romanian tax office, on the other hand, took the view that Adient DE had a fixed establishment in Romania, meaning that the services provided by Adient RO should have been invoiced with Romanian VAT.

ECJ decision

In response to the questions referred, the ECJ pointed out that it is possible for a subsidiary providing services to its parent company to establish a fixed establishment for the parent company. However, the mere fact that Adient DE and Adient RO belong to the same group of companies and that a service contract exists between the two does not, in itself, lead to the establishment of a fixed establishment of Adient DE in Romania.

In the case of a legal entity such as Adient RO, it must be assumed that it uses the staff and technical resources at its disposal for its own needs, i.e. for the provision of services.

The technical and staff resources of Adient RO can only be attributed to Adient DE (which receives the services) if it can dispose of them as if they were its own - which would lead to be considered a fixed establishment of the company receiving the services.

Furthermore, the same resources cannot be used to provide and receive the same services simultaneously.   To be considered a fixed establishment of the service recipient, it must be possible to differentiate between the staff and technical resources of the service recipient from those used by the service provision company to provide those services. Even if one were to assume that the fixed establishment could be both the provider and the recipient of the same service, there would be no taxable transaction because there must be two parties involved in the exchange of services. Furthermore, the activities of a preparatory or auxiliary nature and are not suitable for establishing a fixed establishment.

Even if Adient DE has resources in the form of Adient RO's staff and technical resources in Romania to supply the finished products, this does not indicate the location of the services received by Adient DE from Adient RO, because this could only indicate a fixed establishment that provides services, but not one that receives services.

Implications

Regarding the question of whether an affiliated company can be a fixed establishment of another, the ECJ has caused some uncertainty in recent years. It began in 1997 with the DFDS case (C-260/95) in which the ECJ ruled that a subsidiary that mitigates travel services on behalf of the parent company could be regarded as a fixed establishment of the parent company. In the Daimler and Widex cases (C-318, 319/11), however, it ruled that the subsidiary could not be a fixed establishment of the parent company, partly because it was an independent legal entity (which, of course, the subsidiary in the DFDS case also was).  Ultimately, this was also the view in the Dong Yang case (C-547/18): Whether or not the subsidiary was a fixed establishment was determined by considering economic and commercial reality.

Further clarity was provided by the judgements Berlin Chemie (C-333/20) and Cabot Plastics (C-232/22), in which the ECJ clarified, on the one hand, that the same resources cannot be used to simultaneously provide and receive the service. Secondly, it clarified that a company that provides services exclusively to an affiliated company is using its resources for itself, so that the equipment does not become the resources of the affiliated company.

The contradictory nature of the decisions can at least be somewhat mitigated if one considers that the DFDS judgement, which clearly affirms the existence of a fixed establishment, concerned a situation that is distinct from the other cases. The DFDS case concerned the special regime for tour operators and the question of where the service was provided from an economic point of view. In contrast, all other cases decided concerned the determination of the place of performance according to the place of destination principle, to which the DFDS decision is therefore unlikely to be applicable.

In the Adient case, the ECJ reiterates the key arguments of the Berlin Chemie and Cabot Plastics cases, which speak against a subsidiary being considered a fixed establishment. These can be summarised as follows:

• The same equipment cannot be used to simultaneously provide and receive the same service.
• Companies that only provide services to an affiliated company are considered to be also using their resources for themselves.
• If a taxable person were to receive a supply from their own fixed establishment, there would not be the two persons required for an exchange of supplies.
• The primary linkage for determining the place of supply of services for VAT purposes is the place where the taxable person (recipient of the service) has its registered office. In contrast, the link to a fixed establishment of the taxable person is of secondary importance.

This provides more certainty for the many entrepreneurs who have goods processed in other EU countries by an affiliated company. In the Adient case, the ECJ again mentions that a subsidiary can, in principle, be a fixed establishment, which initially sounds contradictory. However, if one understands this to refer to special cases such as DFDS, this contradiction is resolved. And ultimately, as always, the circumstances of the individual case are decisive for a correct VAT assessment.