A VAT permanent establishment for receiving services, what are the conditions?
Recently the European Advocate General Kokott advised the European Court of Justice CJEU regarding the definition of a permanent establishment for receiving services. This is important for determining who is liable for VAT in relation to the service provided, e.g. the supplier or the receiver.
This opinion among others could have an impact for companies that have a VAT registration number in one or more member states where they are not established nor have a permanent establishment for VAT. In this article we will explain the case and inform you about the advice of the Advocate General regarding permanent establishments for VAT purposes.
A Polish Company, Welmory, together with a Cypriot company has entered into an agreement for co-operation. Welmory had to offer products on a website. The products are sold by means of auctions on the website. Welmory receives the consideration when the products are sold. The Cypriot company had to manage the website.
In order to do that, the Cypriot company in its turn used the services of Welmory for which the Cypriot Company paid a fee. In order to take part in an auction, clients had to buy bid credits first from the Cypriotic company.
This leads to the result that products that were sold on the website generated turnover in two ways:
- The Cypriotic company received the consideration of clients for bid credits and
- Welmory received the consideration for the sold products that were regularly sold below the market value.
Since in the Opinion of Welmory and the Cypriot company the latter had no permanent establishment in Poland, Welmory did not charge Polish VAT and used the reverse charge mechanism. In the opinion of the Polish tax authorities the services of Welmory for the Cypriot company were VAT taxed with Polish VAT. In the opinion of the Polish tax authorities the Cypriotic company possessed a permanent establishment for VAT purposes in Poland.
The question at hand is whether or not the Cypriot company has a permanent establishment for VAT in Poland?
A striking point of this opinion of the Advocate general is that he clearly indicates that in this case it is not relevant if the “establishment” is able to provide services, but only that it is relevant if it is able to receive services for its own needs. This implicates a difference between a permanent establishment for receiving services and for providing services.
However, he also indicates that from a practical point of view it is difficult to imagine a permanent establishment that can receive services for its own needs and at the same time is not able to provide services.
The advocate general quotes the permanent establishment definition that is mentioned in the council regulation: An establishment that is 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.
After analyzing this definition he advises the CJEU to rule that a permanent establishment does not need to have own personnel or technical resources.
It is relevant if these resources of the “establishment” are at the disposal of this “establishment” as if it were its own. Further, these services should be used at the place read: ‘in the country’ of the permanent establishment.
Now we have to wait what the CJEU will decide.
Johan Bos VAT Specialist at Pincvision