The German Federal Tax Court issued a decision on a ‘fixed establishment’ for VAT purposes (ECLI:DE:BFH:2020:U.290420.XIR3.18.0). The case concerned a German business consultant who provides services in third countries on behalf of non-business customers. The question was whether an office building and employee, which have been made available to the consultant during his business trips abroad, must be regarded as fixed establishments in the third countries for VAT purposes. If so, and if the consulting services being provided must be allocated to such fixed establishment, the consultant is not obliged to charge German VAT.
The case is potentially relevant for all VAT taxable persons with cross-border activities. It provides a more detailed interpretation of what a fixed establishment actually is when looking at it from a German VAT perspective. The case has direct implications for businesses with international activities, providing services to external customers, but also to related parties within multinationals.
A case study
A German business consultant provides consulting services to non-business customers. While he delivers these services, the consultant is physically present in third countries. The consultant has access to an office building situated in a foreign country. Moreover, he has the managerial authority over personnel, either employed by the customer or a third party specifically. The personnel performs supporting activities for the consultancy services being provided. To this end, the personnel also has access to the office building.
The German consultant neither charges, nor pays German VAT on the fees received. He believes that the office building based abroad is a fixed establishment for VAT purposes, despite the fact that the company has no own personnel abroad. In short, he believes such a fixed establishment exists, therefore German VAT liability should not come into question.
However, the German tax authorities take the view that the office building and employees, made available by the customer, does not constitute a fixed establishment abroad. The consequence is that the German business consultant is supposed to charge German VAT to his customer (which is a resident in the EU and does not perform any VAT relevant business activity), because the place where his services are supplied is in Germany.
Court confirms the existence of a fixed establishment
The concept of fixed establishment has been understood in such a way that there must be a certain degree of permanence and an appropriate structure of personnel and technical resources in order to provide services.
The German Federal Tax Court (“BFH”) ruled that the German consultant has a fixed establishment in the form of the office premises based abroad, which was permanently made available by the customer. He had free access to these office premises. The consultancy services are also performed (execution and delivery) in this office building.
In the court’s view, the fixed establishment concept does not require the use of own personnel. Instead, there can also be a fixed establishment without the deployment of own personnel, but with the assistance of personnel employed by the service recipient or even third parties. Such deployment of personnel being employed by someone else, however, requires the service provider to have managerial authority over that personnel.
Although it was not decisive for the case in point, the German Federal Tax Court further explained that a fixed establishment for the service-providing consultant would also exist if such personnel, employed by the service recipient but bound by instructions of the service provider, have exclusive and permanent access to the office building.
The judgement was a surprise. Previous judgments issued by the European Court of Justice (ECJ) show that the prerequisite for the existence of a fixed establishment is found in whether own personnel is used. This means that a fixed establishment cannot exist with another business’s personnel.
Situation in other countries
One may make comparisons with a case in Austria. Titanium, a Jersey-based real estate company, owns real estate located in Austria. It leases such VAT-taxed property to Austrian VAT taxable persons. The performance of support and technical management for the real estate is outsourced to an Austrian real estate manager. Titanium does not charge any Austrian VAT on the received rent. It argues that the real estate in Austria is not a fixed establishment for VAT purposes, because Titanium does not employ its own personnel in Austria. Therefore, the Austrian VAT liability is reverse charged to the tenants. However, the Austrian tax authorities take another view.
The Austrian tax court is now asking the ECJ whether the fixed establishment concept must involve the use of one’s own personnel and technical resources or whether a fixed establishment can also exist without the deployment of own personnel but with the assistance of an external service provider.
Alarmingly, the Federal Tax Court stated that the Titanium case pending at the ECJ is not comparable to the German case at dispute. Therefore, it has not asked the ECJ.
In the Netherlands, on February 8, 2019, the Dutch Supreme Court confirmed that real estate, rented out by an owner outside of the Netherlands cannot be regarded as a fixed establishment for VAT purposes, because the owner, based abroad, does not have his own personnel and technical resources in the Netherlands to conclude rental contracts. The assistance of an external Dutch service provider cannot result in that owner having a fixed establishment for VAT purposes in the Netherlands.
Recommended action for businesses
According to the German tax court, a service provider can have a fixed establishment at the site of the customer receiving a service, which is particularly important if the service provider and the customer reside in two different countries. This view seems to be in conflict with the position of foreign tax courts and the ECJ.
Foreign businesses, which provide cross-border services, could prepare accurate documentation to demonstrate that they have no disposal of the personnel and technical resources of the service-receiving German customer.