Can a subsidiary constitute a fixed establishment of a foreign parent company?

For foreign companies interested in operating in the EU, it is important to know when a structure is regarded as a fixed establishment (FE) for VAT purposes.

In this respect, Advocate General Kokott’s preliminary findings in case C-547/18, on whether or not a subsidiary constitutes a FE, are particularly relevant. The events that prompted the preliminary ruling concern a Korean company which, as the parent company of a subsidiary in Poland, commissioned services from a Polish company. The fact that this commission was carried out through the subsidiary gave rise to a dispute over whether the services were actually supplied to the parent or the subsidiary. In the end, the Polish entity issued invoices without VAT to its Korean client. The Polish authorities considered that by “exploiting the economic potential” of its subsidiary, the parent company had created a FE in Poland, and so they levied the corresponding VAT. They also considered that the service provider should have checked and discovered that the actual beneficiary of the services was the subsidiary.

The Court of Justice of the European Union (CJEU) is yet to rule on this matter. For her part, the AG maintains that the fact that a parent company from a third country has a subsidiary in a Member State does not necessarily mean that the subsidiary constitutes a FE of the parent, since it is a taxable person with its own legal personality. In this case, they do not belong to the same group for VAT purposes either, as they are located in different countries. Furthermore, a reverse charge procedure would be unusual, since the parent company need not be fully aware of another legal person’s transactions, even if the latter is a subsidiary.

A different conclusion could be reached if the prohibition of abusive practices was infringed [1]. However, this possibility has been ruled out, since the Korean company commissioned the Polish company directly, rather than, for example, through its subsidiary.

Finally, the AG points out that the legislation does not stipulate what checks the provider must carry out in order to ascertain whether a subsidiary constitutes a FE. She adds that the provider is not obliged to investigate the relationship between the parent company and its subsidiaries to a level exceeding the requirements of reasonable due diligence.

While we await the CJEU’s ruling, it is worth remembering the Spanish Supreme Court’s judgment 509/2018, of 23 March 2018, on a similar issue, which contained arguments comparable to those set out here

[1] CJEU Case C-255/02, 21.02.2006, Halifax.

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