European Court of Justice confirms receiving services from linked supplier in another EU country does not constitute VAT Fixed Establishment
On June 13, 2024, the Court of Justice of the European Union (ECJ) issued a ruling in the Adient case (Case C-533/22), clarifying whether a toll manufacturer constitutes a fixed establishment for VAT purposes within the European Union (EU). The case addressed VAT obligations between companies in different Member States, specifically focusing on whether outsourcing manufacturing operations creates a fixed establishment in another country.
The ECJ’s decision provides clarity on what constitutes a fixed establishment for VAT purposes within the EU, emphasising that the recipient of services must have its own distinct resources to create such an establishment. This ruling helps multinational companies navigate cross-border VAT obligations and avoid unnecessary tax liabilities in countries where they lack a true operational presence.
Legal Background
Under EU VAT law, services provided to a business are typically taxed where the business is established. However, if those services are provided to a fixed establishment of the business in another country, VAT is charged where that fixed establishment is located. A fixed establishment is characterized by sufficient permanence and appropriate human and technical resources that allow the recipient of the services to use them independently for its own operations.
The Adient Case
The case involved Adient Germany and Adient Romania, two entities within the same corporate group. Under a contract, Adient Romania provided manufacturing and assembly services for Adient Germany’s products. The Romanian tax authority argued that Adient Germany had a fixed establishment in Romania because Adient Romania’s resources effectively allowed Adient Germany to conduct business there. Therefore, the authority ruled that Adient Romania should collect Romanian VAT on the services provided to Adient Germany.
Adient Germany disputed this, asserting that the necessary conditions for a fixed establishment had not been met, and that the VAT obligations should not apply in Romania.
ECJ Ruling
The ECJ ruled that simply belonging to the same corporate group or receiving services under a contract does not automatically create a fixed establishment for VAT purposes. The court emphasized that to establish a fixed establishment, the recipient of services must have its own human and technical resources distinct from those of the service provider, enabling it to carry out its operations independently in the Member State.
In Adient’s case, the ECJ found that Adient Germany did not have a fixed establishment in Romania, as it did not have the necessary independent infrastructure there. The fact that Adient Romania provided manufacturing services and shared systems (such as IT and accounting) was insufficient to establish a permanent operational presence for Adient Germany in Romania.
