Fixed establishment through an affiliate company?

A recent decision of the Court of Appeal of Liège (22 October 2021, 2020/RG/765) highlights the issues which Belgian companies face with an outdated reading by the Belgian VAT authorities of the notion of “fixed establishment”.

For VAT purposes a fixed establishment is “any establishment characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources” (Article 11 of Regulation (EU) No 282/2011). This concept is not the same as a permanent establishment for income tax purposes.

When a supplier and his B2B customer are established in two different countries, this is a cross-border supply and VAT is due in the country where the customer is established. The supplier does not charge VAT.

However, if the customer has a fixed establishment in the same country as the supplier, that is a completely different game. The services are not supplied cross border anymore and the supplier has to charge VAT. This is, generally speaking, just a formality. The supplier charges VAT, collects the VAT from the client and pays it to the VAT authorities; the client recovers the VAT from the VAT authorities through his fixed establishment.

The VAT is neutral.

However, when the VAT authorities find – years later – that the client has a fixed establishment in the same country, they can retroactively claim the VAT from the supplier plus interest (at 0.8% per month or 9.6% per year) and penalties.

When the VAT and the interest become a cost for businesses, the VAT is not so neutral anymore.

The Belgian VAT authorities hold on to a text: practice note) they issued in 2003 on fixed establishments. From this practice note, they developed the argument that an overseas company has a fixed establishment when the employees of a Belgian company provide services to that company even if they are not employed by that company.

This position of the Belgian VAT authorities is not in line anymore with the recent decisions of the European Court of Justice, in particular in re C-931/19 Titanium, where the court stated that a Jersey company does not have a fixed establishment in Austria when letting a property if it does not have its own staff to perform services relating to the letting. The same question has also been put to the Court by the Bucharest Court of Appeal in case C-333/20, Berlin Chemie A. Menarini SRL).

Amcham Belgium has urged the Belgian tax authorities to update its practice note to take account of the principles applied by the European Court of Justice and to provide legal certainty and a set of simple-to-apply and simple-to-interpret rules to determine whether an overseas entity has a fixed establishment in Belgium.). In the Netherlands, the Secretary of State for Finance has adapted the internal guidelines at the end of 2020.

In the case before the Liège Court of Appeal, the Belgian VAT authorities claimed VAT from a Belgian company S. Logistics SA because SRO Arthom, an affiliated Slovakian company, had a fixed establishment in its premises.

The Special Tax Inspectorate found a computer with SRO Arthom’s fleet management software, stamps, CMR consignment notes, insurance policies, letters, e-mails, etc. They also found that the company’s staff was taking care of some of the day-to-day management of the Slovak company. The tax authorities claimed that the latter had a fixed establishment characterized by a sufficient degree of permanence and an appropriate structure, in terms of human and technical resources so that the services to SRO Arthom could not be invoiced without VAT for intracommunity services.

The Court of Appeal of Liège confirms the position of the Belgian tax authorities that SRO Arthom has a fixed establishment in Belgium through the Belgian affiliate company and that the services provided by SRO Arthom to the Belgian company and two other Belgian companies are to be invoiced with Belgian VAT.

However, the Belgian tax authorities went a step further and argued that because SRO Arthom has a fixed establishment in Belgium, the services provided by S. Logistics SA to SRO Arthom for intracommunity transport should have been invoiced with Belgian VAT.

The Court of Appeal found that the existence of a fixed establishment only affects the place where the services are provided, but that the Belgian tax authorities did not prove that there had been no intracommunity transport.