News article

Subsidiary tolling only goods for foreign parent company is not a permanent establishment of the latter

Cabot is a Swiss company identified for VAT in Belgium for the sale of carbon-based products. It enters into a tolling contract with the Belgian group company Cabot Plastics. Cabot Plastics exclusively uses its own equipment to process the raw materials into products used in the production of plastics. These services constitute virtually all of Cabot Plastics’ turnover.

After processing, the goods remain stored in Belgium at Cabot Plastics to be later sold from here by Cabot Switzerland. The removal and transportation of the goods is done by the buyers of the products or by transporters appointed by Cabot Switzerland (the seller).

In addition to processing the goods, Cabot Plastics performs a range of additional services for Cabot Switzerland:

• the storage of products;
• providing recommendations for optimizing the production process;
• internal and external technical audits and evaluations;
• communicating results to Cabot Switzerland;
• supplies or services required by other production units.

In a 2012 ruling, the Belgian ruling commission agreed that the activities of Cabot Plastics would not result in Cabot Switzerland having a permanent establishment in Belgium for income tax purposes. However, following a tax audit in 2017, the tax authorities ruled that a permanent establishment does exist in Belgium for VAT. The people and technical resources used by Cabot Plastics to perform its services for Cabot Switzerland are also, according to the Belgian tax authorities, the permanent establishment in Belgium of Cabot Switzerland for which Cabot Plastics performed its services.

Under this assumption by the Belgian tax authorities, based on the main B2B rule for VAT, the services performed by Cabot Plastics take place in Belgium, where the permanent establishment is located for which the services are performed. Thus, Cabot Plastics should have charged Belgian VAT on its services to the Swiss group company, instead of issuing invoices without VAT, assuming that the place of supply of services based on the B2B main rule was Switzerland (Cabot Switzerland’s place of business).

B2B main rule: principal place of business or permanent establishment?

The B2B main rule (Article 44 VAT Directive) states that a service for VAT purposes takes place where the VAT-taxable customer has established the seat of his business. But if that service is provided to a fixed establishment of the customer located elsewhere, then that service for VAT purposes takes place where that fixed establishment is located. In application of this B2B principal rule, the establishment of the place of business as the place of supply of services will only be deviated from in favor of the place where the customer has a fixed establishment, if the service is supplied only to that fixed establishment which uses the service for its own needs (Article 21, 2nd paragraph of Implementing Regulation 282/2011). But then there must first be a permanent establishment that purchases the services for its activity.

Permanent establishment

According to Article 10 of Implementing Regulation 282/2011, the place of business is the place where the central management functions of the company are carried out. Article 11 of the Implementing Regulation 282/2011 defines as a permanent establishment as referred to above: any establishment other than the aforementioned place of business characterized by a sufficient degree of permanence and a structure – in terms of personnel and technical resources – suitable for the purchase and on-site use of the services provided for its own needs. Thus, there cannot be a permanent establishment

• without a clear structure reflected in the availability of personnel or technical resources;
• if this structure exists only temporarily.

With regard to the first criterion, the Court has already ruled that in light of the principle of economic and commercial reality (a fundamental principle of the VAT system), it is sufficient that the person liable for VAT can dispose of those staff and technical resources as if they were his own, for example on the basis of service or rental agreements that place those staff and resources at the disposal of the person liable for VAT and that cannot be terminated at short notice (C- 333/20, Berlin Chemie dd. 07.04.2022).

The Court has also ruled that the concept of “permanent establishment” must be assessed by reference to economic and commercial reality. That qualification cannot depend solely on the legal status. The fact that a company has a subsidiary in another Member State does not automatically mean that it has a permanent establishment there.

And the fact that a company uses its human and technical resources only to provide services for one other (affiliated) company does not mean that these resources are made available to that customer. According to the Court, a legal person is deemed to use the human and technical resources at its disposal for its own needs, even if it has only one customer. Those resources can only constitute a permanent establishment of that customer if the latter can dispose of them as if they were its own.

To determine whether the services are performed for and used locally by the alleged permanent establishment, a distinction must be made between, on the one hand, the contract work services performed by Cabot Plastics for Cabot Switzerland and, on the other hand, the sale of the resulting goods by Cabot Switzerland. The Court found that the file presented did not show that a distinction could be made between the “resources” used by Cabot Plastics to perform its services for the Swiss group company and the “resources” that, according to the tax authorities, are used by the latter to purchase these services in Belgium within its “alleged” permanent establishment. And the Court previously ruled that the people and technical resources performing the services cannot at the same time constitute a permanent establishment of the foreign company receiving those services.

According to the Court, the contract work services are purchased by Cabot Switzerland and used for the realization of its economic activity, namely the sale of the goods resulting from these services in Switzerland. Indeed, Cabot Switzerland does not have an appropriate structure in Belgium for this activity.

The Court in fact comes to the same conclusion as in the aforementioned Berlin Chemie case. There it ruled that a subsidiary that only provides marketing services for the sales activity of the parent company is not a permanent establishment of the parent company.

Operative part of the judgment

Article 44 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2008/8/EC of 12 February 2008, and Article 11 of Council Implementing Regulation (EU) No …. 282/2011 of 15 March 2011 laying down implementing measures for Directive 2006/112 must be interpreted as meaning that a taxable person receiving services whose place of business is established outside the European Union does not have a fixed establishment in the Member State in which the supplier of the services in question – legally distinct from that person – is established if it does not have at its disposal there a, suitable structure in terms of staff and technical resources to form that fixed establishment, even though the taxable service provider, in performance of an exclusive contractual obligation, supplies to that taxable service recipient payroll services and a range of ancillary or ancillary services which contribute to the taxable service recipient’s economic activity in that Member State.

ECJ, C-232/22, Cabot Plastics, June 29, 2023