This Court of Justice of the European Union (CJEU) case examined the concept of fixed establishment for VAT on services supplied to a company which has established its place of business in another Member State.

Key facts

Welmory Ltd, established in Cyprus, (‘the Cypriot company’) organises sales by auction on an online sales platform. It sells packets of ‘bids’, that is, the right to make an offer to purchase goods being auctioned at a higher price than the price last offered.

According to the documents before the CJEU, the Cypriot company concluded a cooperation agreement with the Polish company in 2009, under which it agreed to provide the Polish company with the service of making available an internet auction site with a specific domain name, including also the supply of associated services related to the leasing of the servers needed for the site to function and the display of the goods to be auctioned. The Polish company undertook principally to sell goods on that site.

The customer first purchases a number of ‘bids’ from the Cypriot company on the online sales site. Those ‘bids’ then give the customer the right to take part in the sale of the goods offered for auction by the Polish company on that site and to make an offer to purchase one of the items. Unlike in the classic auction system, in order to make a bid the customer must not only undertake to pay a higher price than that last offered, but must ‘pay’ for ‘bids’ for that purpose. Finally, the goods are sold to the customer who by means of ‘bids’ has offered the highest price for them.

Evidence before the Court showed that the source of the Polish company’s income is, first, the selling price obtained in the online auctions and, secondly, the remuneration received from the Cypriot company corresponding to part of the proceeds of sale of the ‘bids’ used by the customers in Poland to bid in the auction.

In April 2010 the Cypriot company acquired 100% of the share capital of the Polish company. Before that acquisition, the Polish company issued four invoices for services supplied to the Cypriot company (advertising, servicing, provision of information and data processing). The view taken was that those services had been supplied at the place of establishment of the Cypriot company and should accordingly be subject to VAT in Cyprus, the Polish company, while indicating that VAT was payable by the recipient of the services, did not invoice VAT.

However, the Director of the Gdańsk Tax Chamber, (‘the Dyrektor’) considered that these were supplies of services to a fixed establishment of the Cypriot company in Polish territory and that they should consequently be taxed in Poland at the standard rate of 22% in accordance with Article 28b(2) of the Law on VAT.

Argument

The Polish company brought an action for annulment of the Dyrektor’s decision before the Polish Regional Administrative Court arguing that an independent operator conducting an independent activity as a taxable person for VAT purposes cannot constitute a fixed establishment of another taxable person.

That action was dismissed having regard in particular to the specific nature of the services supplied by the Cypriot company in Polish territory. It considered that the company did not have to have permanent human and material resources in the traditional sense, or make direct use of buildings located within Polish territory, or employ staff there, in order to be regarded as having a fixed establishment there. The two companies’ activities formed an economically indivisible whole, as the object of their entire business could be achieved in Poland only through cooperation between them.

In support of this decision, it was considered that the Cypriot company was making use in Polish territory of the Polish company’s technical and human resources, so that the Polish company was to be treated as a fixed establishment of the Cypriot company in Poland. Consequently, it considered that the services supplied by the Polish company to the Cypriot company had been supplied to the latter’s fixed establishment in Poland, and were therefore taxable in Poland.

The Polish company appealed on a point of law against the judgment to the Supreme Administrative Court of Poland (‘the Supreme Court’).

In view of the specific features of the case before it, the Supreme Court was uncertain whether Article 44 of the VAT Directive may be interpreted as meaning that the place of taxation of supplies of services is located in Poland where the services are supplied by a Polish company to another company established in Cyprus, the two companies being independent of each other in terms of capital and the Cypriot company conducting its economic activity by making use of the infrastructure of the Polish company.

The Supreme Court also observed that the Court’s case-law on the concept of fixed establishment relates to factual and legal situations that differed from the situation at issue in the case before it.

According to that Court, this particular case concerns a situation in which, at the material time, the two companies were independent of each other. Moreover, the Court’s case-law relates to a situation in which the place of the fixed establishment is defined in relation to the supplier of services, and furthermore concerns the situation in which the fixed establishment is defined in relation to supplies of services to a third party, namely the final consumer.

In those circumstances, the Supreme Court decided to stay the proceedings and to refer to the Court for a preliminary ruling;

‘For the purposes of the taxation of services supplied by [the Polish company], which is established in Poland, to [the Cypriot company], which is established in another Member State of the European Union, in circumstances where [the Cypriot company] carries out its economic activity by making use of [the Polish company’s] infrastructure, is the fixed establishment within the meaning of Article 44 of [the VAT Directive] situated in the place in which [the Polish company] is established?’

Thus the case constituted a request for a preliminary ruling concerning the interpretation of Article 44 of Council Directive 2006/112/EC of 28 November 2006 on the common system of VAT, as amended by Council Directive 2008/8/EC of 12 February 2008 (‘the VAT Directive’).

Several of the parties to the proceedings submitted that the question was not whether the supplies of services by the Polish company to the Cypriot company are supplies of services to the Cypriot company’s fixed establishment in Poland, but in which country, Poland or Cyprus, the ‘bids’ sold by the Cypriot company to customers in Poland must be subject to VAT.

Decision

The Polish Government claimed that the taxable amount of the goods sold by auction by the Polish company on the Cypriot company’s online sales site may not have been correctly assessed. The government raised the question whether, in accordance with Article 73 of the VAT Directive, the taxable amount which the Polish company was required to declare ought not to consist of, first, the price of the goods sold at auction and, secondly, the remuneration obtained from the Cypriot company corresponding to part of the proceeds of sale of the ‘bids’ used by the customers in Poland in the auctions.

However, the Court pointed out that the subject-matter of the question referred for a preliminary ruling related essentially to the place of taxation of services supplied by the Polish company to the Cypriot company, and hence the interpretation of Article 44 of the VAT Directive, not to the place of taxation of the ‘bids’ or the determination of the taxable amount of the goods sold by auction by the Polish company.

The referring court was essentially asking in what circumstances a first taxable person who has established his business in one Member State, and receives services supplied by a second taxable person established in another Member State, must be regarded as having a ‘fixed establishment’ within the meaning of Article 44 of the VAT Directive in that other Member State, for the purpose of determining the place of taxation of those services.

The VAT Directive, in common with the Sixth Directive which it replaced, contains a Title V dealing with the place of taxable transactions. Chapter 3 relates to the place of supply of services, and sections 2 and 3 of that chapter set out respectively the general rules for determining the place of taxation of those supplies and particular provisions relating to specific supplies of services.

The main proceedings relate to the interpretation of Article 44 of the VAT Directive, which states that the place of supply of services to a taxable person is no longer determined by reference to the taxable person supplying the services but by reference to the taxable person receiving them.

The question therefore arises whether the Court’s case-law on the interpretation of Article 9(1) of the Sixth Directive is still relevant, having regard to the changes made by Article 44 of the VAT Directive.

The wording of Article 44 of the VAT Directive is similar to that of Article 9(1) of the Sixth Directive. Furthermore, both Article 44 of the VAT Directive and Article 9(1) of the Sixth Directive are provisions determining the point of reference for tax purposes of supplies of services and pursue the same objective, so that the Court’s case-law on the interpretation of Article 9(1) of the Sixth Directive can in principle be applied to the interpretation of Article 44 of the VAT Directive.

That conclusion is borne out by the Implementing Regulation, the objective of which, is to ensure a more uniform application of the VAT system by laying down rules implementing the VAT Directive, in particular in respect of taxable persons, the supply of goods and services, and the place of taxable transactions. Even though that regulation was not yet in force at the material time, it was none the less taken into account.

The Court’s case-law on Article 9(1) of the Sixth Directive and the Implementing Regulation were of relevance.

The question that arises is that of defining the place of supply of services, and more particularly of defining the criteria for establishing whether the Cypriot company has a fixed establishment in Poland.

Article 44 of the VAT Directive states that the place of supply of services to a taxable person acting as such is the place where that person has established his business. However, if those services are provided to a fixed establishment of the taxable person located in a place other than the place where he has established his business, the place of supply of those services is the place where that fixed establishment is located. In the absence of such a place of establishment or fixed establishment, the place of supply of services is the place where the taxable person who receives such services has his permanent address or usually resides.

Article 44 of the VAT Directive is a rule determining the place of taxation of supplies of services by designating the point of reference for tax purposes, and consequently delimiting the competences of the Member States. That provision aims to create a rational delimitation of the respective areas covered by national rules on VAT by determining in a uniform manner the point of reference for tax purposes of supplies of services.

It is necessary, therefore, first to determine the primary point of reference in order to establish the place of supply of services, and then to define the criteria which must be satisfied for a taxable person receiving services, such as that at issue in the main proceedings, with its place of business in one Member State, to be regarded as having a fixed establishment in a Member State other than that in which it has established its business.

According to the settled case-law of the Court on Article 9 of the Sixth Directive, the most appropriate, and primary, point of reference for determining the place of supply of services is the place where the taxable person has established his business.

In the context of Article 44 of the VAT Directive, the place of supply of services is no longer determined by reference to the taxable person supplying the services but by reference to the taxable person receiving them. The concept of fixed establishment must therefore be determined in relation to the taxable person receiving the services.

The Court’s case-law, which directly inspired the wording of Article 11 of the Implementing Regulation, that a fixed establishment must be 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.

So, to be considered as having a fixed establishment the Cypriot company must have in Poland at the very least a structure characterised by a sufficient degree of permanence, suitable in terms of human and technical resources to enable it to receive in Poland the services supplied to it by the Polish company and to use them for its business, namely running the electronic auction system in question and issuing and selling ‘bids’.

The fact that a business such as that carried on by the Cypriot company consisting in operating a system of electronic auctions which comprises, first, making an auction website available to the Polish company and, secondly, issuing and selling ‘bids’ to customers in Poland, can be carried on without requiring an effective human and material structure in Polish territory is not determinative.

Despite its particular character, such a business requires at least a structure that is appropriate in terms especially of human and technical resources, such as appropriate computer equipment, servers and software.

In its written observations and at the hearing the Polish company argued that the infrastructure it makes available to the Cypriot company does not enable the Cypriot company to receive and use for its business the services supplied to it by the Polish company.

According to the Polish company, the human and technical resources for the business carried on by the Cypriot company, such as computer servers, software, servicing and the system for concluding contracts with consumers and receiving income from them, are situated outside Polish territory. It claims that those factual circumstances were not verified in the main proceedings.

However, the national court has exclusive jurisdiction to verify such factors in order to assess whether the Cypriot company has the necessary human and technical resources in Poland for it to be able to receive services supplied by the Polish company and to use them for the operation and maintenance of the auction sales website and the issuing and selling of ‘bids’.

If the facts alleged by the Polish company were shown to be correct, the referring court would then be led to conclude that the Cypriot company does not have a fixed establishment in Poland, since it does not have the necessary infrastructure to enable it to receive services supplied by the Polish company and to use them for its business.

The fact that the economic activities of the two companies, which are linked by a cooperation agreement, form an economic whole and that their results are of benefit essentially to consumers in Poland is not material for determining whether the Cypriot company possesses a fixed establishment in Poland.

Therefore, the answer to the question referred for a preliminary ruling is that a first taxable person who has established his business in one Member State, and receives services supplied by a second taxable person established in another Member State, must be regarded as having a ‘fixed establishment’ within the meaning of Article 44 of the VAT Directive in that other Member State, for the purpose of determining the place of taxation of those services, if that establishment is characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive the services supplied to it and use them for its business, which is for the referring court to ascertain.

The full judgement of the case is available from http://curia.europa.eu/