Where is the concept of fixed establishment heading?

company structure

In recent months, national courts referred a number of cases to the Court of Justice of the European Union (CJEU), asking to provide more guidance of the concept of fixed establishment (FE). In Titanum vs. Austria (C-931/19), the question is whether an FE can exist without the deployment of its own personnel and whether the use of human resources of an independent contractor is sufficient. In Berlin Chemie (C-333/20), the referring court asks whether a sub-subsidiary can be regarded as an FE of the parent company if it operates under the parent’s control and performs its activities entirely for the business purpose of the parent.

Let’s take a look at the issue of human resources. According to the established case law and the FE definitions in the VAT Implementing Regulation, a FE cannot exist without an adequate structure in terms of human and technical resources. As the CJEU should merely interpret the VAT law and not go beyond it, it is unlikely that the CJEU will contradict the wording of the VAT Implementing Regulation and rule that human resources are not needed any more. However, the Court may say that the FE’s own human resources are not needed but the presence of personnel of a “dependent” entity suffices. The CJEU ruled along these lines in the DFDS (C-260/95) case where a subsidiary acting as an auxiliary organ of the parent was considered to be an FE of the parent. It remains to be seen whether the Court will use the DFDS arguments as it frequently said that the DFDS judgement should not be generalized and must be viewed in the specific circumstances of that case.

Domestic courts have different opinions on whether the presence of human resources is needed. In a case with facts similar to Titanum vs. Austria, the Dutch Supreme Court ruled that a immovable property (holiday home) of a foreign owner cannot be regarded as a FE when it is managed by a local independent company. The Tax Court of Nordrhein-Westfalen considered windmills to be FEs even if there was no personnel present to operate them. The lack of human resources was said to be compensated by the importance of technical resources.

Although the criterion of human resources has always been part of the FE definition in the VAT Implementing Regulation, the initial intention of the EU legislator was to have a FE concept based solely on technical resources. In 1984, in the proposal for a Nineteenth VAT Directive, the European Commission proposed a definition of the FE that would be more aligned with the definition of the permanent establishment used in direct taxation. According to the proposal, “the expression ‘fixed establishment’ (..) means any fixed installation of a taxable person, even if no taxable transaction can be carried out there”. If this proposal had been approved, there would be similar concepts for both VAT and direct tax purposes and the question whether human resources are needed would become obsolete. Maybe given the technological developments allowing to provide services without permanent human presence the legislator should go back to its roots and look at the FE concept in the proposed Nineteenth VAT Directive again?