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CJEU again rules that toll manufacturer is not a fixed establishment for VAT purposes

Indirect Tax Alert | VAT Alert

On 13 June 2024, the Court of Justice of the European Union (CJEU) issued its decision in case C-533/22 (SC Adient Ltd & Co. KG), concerning whether a controlled company or a group company is to be regarded for VAT purposes as a fixed establishment of the parent company or another group company. This is the fifth time that the CJEU has been requested to rule on this issue since the court’s 2020 judgment in C547/18 (Dong Yang Electronics).

In considering the case, and in line with its previous decisions, the CJEU has confirmed that the mere fact of belonging to the same group of companies, or being linked through a contractual agreement, is not sufficient to constitute a fixed establishment. In addition, the subsequent supply of goods, and the operations linked to such a supply, are considered as not relevant in determining whether there is a fixed establishment receiving the services.

Furthermore, the court has reiterated that there is no fixed establishment where the human and technical means used to render the services are virtually the same as the ones for receiving those same services, or where these human and technical means are merely involved in preparatory and auxiliary operations.

Background and facts of the case

The Adient group has its head office in Europe and is a global supplier to manufacturers in the automotive industry.

In June 2016, SC Adient Ltd & Co. KG (“Adient Germany”) concluded a contract with SC Adient Automotive Romania SRL (“Adient Romania”) whereby the latter would provide a comprehensive service consisting of both the manufacture and assembly of upholstery components, as well as ancillary and administrative services. The (toll) manufacturing services consist of cutting and sewing raw materials to make car seat covers, while the ancillary services include storing raw materials and finished products, and taking delivery of, inspecting, and managing raw materials.

Adient Germany purchases the raw materials which it sends to Adient Romania  for treatment. Adient Germany is the legal owner of the raw materials, semi-finished products, and finished products throughout the treatment process.

Adient Romania invoiced Adient Germany without Romanian VAT, for its services rendered, applying the general business-to-business rule for the place of supply of services, as it considered that the location of the supply of those services was in Germany, where the recipient of the services is established. The Romanian tax authorities, however, concluded that Adient Romania was required to collect VAT on the services supplied to Adient Germany. The tax authorities maintained that the place of supply of the services was Romania, as Adient Germany had a fixed establishment in Romania through the human and technical resources of Adient Romania.

Dispute proceedings reached the Tribunalul Argeş (the Regional Court of Argeş in Romania) and the court referred the matter to the CJEU.

Questions referred to the CJEU: Opinion of the advocate general

Eight questions were referred to the CJEU, aiming to receive confirmation on the different arguments invoked by the tax authorities to corroborate the existence of a fixed establishment, in particular, questions on:

  • The possible relevance of the fact that the entities concerned belong to the same group of companies; and
  • The fact that the entities are bound by a service agreement;
  • The fact that some other (ancillary) activities for the principal company, related to the subsequent supply (semi)finished goods, are performed locally by the Romanian toller.

The question was also raised as to whether there could be a taxable supply of services if the human and technical resources of the fixed establishment receiving the services are virtually the same as those of the provider through whom the services are actually performed.

In her opinion of 1 February 2024, Advocate General (AG) Kokott noted that group companies remain independent entities for VAT purposes, but that this does not preclude the possibility of a company (B) providing human and technical resources to a different company (A) in such a manner that B constitutes a fixed establishment of company A.

However, a contract for the supply of services between two group companies is principally not a contract for the provision of resources, as the service provider fulfills the obligations arising out of that contract in its own name and economic interests as an independent contract partner. The fact that the services are eventually also consumed in the EU member state of residence of company B should not alter this conclusion, except in the case of abusive practices.

In the AG’s opinion, even if company B were to constitute a fixed establishment of company A, the same human and technical resources of company B cannot be used to both provide and receive the same services.

Consideration of the case by the CJEU

The court has now followed the advocate general’s opinion, and provided the following points:

  • The sole fact of belonging to the same group, or being bound by a contract for the provision of services is not sufficient to conclude to the existence of a fixed establishment for purposes of the localization of services. The service provider fulfils the obligations arising out of that contract in its own name and economic interests as an independent contract partner.
  • Neither the fact that a company has, in a member state other than the member state of its business, a local structure intervening in the subsequent supply of the finished goods resulting from the manufacturing services, nor the fact that those supply transactions are carried out mostly outside the country of manufacturing are relevant to establish that that company has a fixed establishment for purposes of the localization of services. The  supply of services received and the supply of goods are to be analysed separately.
  • A taxable person has no fixed establishment if its local human and technical resources used to receive the service cannot be distinguished from the human and technical resources used to supply the service. There can also be no fixed establishment if these human and technical resources perform preparatory or auxiliary activities.

Implications of the decision

The decision is in line with the decision in the Cabot Plastics Belgium case (C-232/22) and confirms that some of the arguments invoked by the tax authorities to conclude to the existence of a fixed establishment, and impose a different localisation of services, are not relevant and should thus not be considered.Considering the focus from certain tax authorities across the EU with respect to fixed establishments for VAT purposes, and where the abovementioned Cabot case has not resolved all open matters with the tax authorities, this CJEU ruling has been keenly awaited.

As the questions asked of the CJEU are very specific, the immediate impact will be mainly for groups involving toll manufacturers. However, by repeating principles laid down in earlier case law and further clarifying the concept of a fixed establishment, this decision is expected to bring more legal certainty for all multinational group companies performing economic activities through established subsidiaries. In Belgium, it is hoped that this decision will bring a conclusion to the different cases involving toll manufacturers. It remains to be seen how the Belgian tax authorities will deal with this judgement in other cases with different facts and circumstances.