On 7 May 2020 the European Court of Justice issued a judgement in the case involving a Polish company Dong Yang Electronics sp. z o. o. (hereinafter: “Dong Yang”) and the Director of the Tax Administration Chamber in Wrocław (C‑547/18), in which it stated that a service provider cannot determine the existence of a fixed establishment in a member state of a company seated in a country outside the EU on the basis of a mere fact that the company has a subsidiary in this member state and that the service provider is not obliged to verify, for the purpose of such a determination, the contractual relationships between these entities.
Dispute in the main proceedings
Dong Yang established in Poland provided to LG Display Co. Ltd. established in the Republic of Korea (hereinafter: “LG Korea”) services consisting in the assembly of printed circuit boards from certain materials owned by LG Korea. These materials were provided to Dong Yang by LG Display Polska sp. z o. o. (hereinafter: “LG Polska”), a subsidiary of LG Korea. Dong Yang in turn provided the processed printed circuit boards to the Polish subsidiary. Dong Yang issued invoices to LG Korea for assembly services, considering these services not being subject to VAT in Poland. Thus, this led to a dispute between the Polish company Dong Yang and the tax authorities whether the abovementioned assembly services were performed to the commissioning entity, i.e. LG Korea established outside the EU, or to its fixed establishment in Poland.
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Thus, on 6 June 2018 the Regional Administrative Court in Wrocław referred the following questions to the Court for a preliminary ruling:
- Can it be inferred, from the mere fact that a company established outside the European Union has a subsidiary in the territory of Poland, that a fixed establishment exists in Poland within the meaning of Article 44 of the VAT Act Directive and Article 11(1) of the Implementing Regulation?
- If the first question is answered in the negative, is a third party required to examine contractual relationships between a company established outside the European Union and its subsidiary in order to determine whether the former company has a fixed establishment in Poland?
The judgement of the CJEU issued today stipulates that the mere fact that a company established outside the EU has a subsidiary in a member state does not automatically mean that it has a fixed establishment in this country within the meaning of the VAT Act. Pursuant to the judgement, it is possible for a subsidiary to constitute a fixed establishment of its parent company, however, such a qualification depends on substantive conditions laid down in the Council Implementing Regulation (EU) No. 282/2011 of 15 March 2011 laying down implementing measures for Directive 2006/112/EC (hereinafter “Regulation”), especially in Article 11, which should be put in the context of economic reality.
As regards the second question, the CJEU decided that Article 22 of the Regulation fails to stipulate that the service provider is obliged to verify the contractual relationships between the company established in a country outside the EU and its subsidiary to determine if the company has a fixed establishment in a given member state. Additionally, the Court agreed with the Opinion of the Advocate General stating that, “the tax authorities may not oblige the service provider to verify the contractual relationships between the parent company and its subsidiary when the relevant information is inaccessible to him and de facto transfer their own investigation tasks to him”.
Certainly, the judgement of the Court has provided taxable persons with additional arguments in disputes with Polish tax authorities, however, time will tell if it will be able to change the current negative practice of the tax authorities in Poland.
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