European Court of Justice finds (Cabot Plastics) providing ancillary services to toll manufacturing by group company does not trigger VAT Fixed Establishment status
The European Court of Justice has today ruled (Cabot case (C-232/22)) that the VAT Fixed Establishment status and associated VAT obligations are not triggered by merely receiving ancillary services in a toll manufacturing (processing contracts) structure involving Belgium (or any EU country other than the one the business is legally established). The ECJ concluded that a Swiss resident business did not have FE status merely because the Belgian resident supplier was a linked company. The place of supply was therefore Switzerland, and not Belgium, so no Belgian VAT due on the toll manufacturing services.
Note: ruling is in agreement with related Berlin Chemie ECJ ruling on Fixed Establishment.
Background to case – Belgian VAT due with fixed establishment status
The case revolved around whether a Belgian toll manufacturer can qualify as a fixed establishment of a Swiss principal when the companies are related.
Cabot Switzerland GmbH (Cabot CH) had contracted Cabot Plastics (Cabot BE) to make plastic products of it. Cabot BE has no other customers and was acting as a toll manufacturer to Cabot CH. Tolling is outsourcing (by Cabot CH) all the production or part of it to a third-party company (Cabot BE) where the contractor provides all the raw materials or semi-finished products to the third-party company. Crucially for this case, Cabot CH had no contractual control over the resources, staff etc. of Cabot BE. This became a key question in the case – did Cabot have access to the Belgian resources through merely having an exclusive toll manufacturing agreement and therefore a Belgian Fixed Establishment. (The ECJ said ‘no’ and would need controlling, permanent contract e.g. leasing agreement.)
In addition, Cabot BE offered storage, admin and other services. Both companies were owed by the same holding company, so related. The Belgian tax authorities believed that this gave Cabot CH a VAT fixed establishment in Belgium. Therefore, for the services element of the contract, Belgian VAT should have been charged to Cabot CH. This is based on FE meant the place of supply was Belgian. Instead, Cabot BE had assumed Cabot CH as Swiss had a place of supply for services in Switzerland. So had reverse charged the services and not collected Belgian VAT.
This issues was escalated to the ECJ with three questions regarding the interpretation of Article 44 of the VAT Directive and Article 11 of Implementing Regulation No 282/2011 in relation to
- whether a taxable person established outside the EU should be deemed to have a fixed establishment in a Member State if they receive services from a separate but legally independent entity within the same group,
- whether a taxable person can have a fixed establishment through the use of resources provided exclusively by a service provider within the same group, and
- whether a taxable person has a fixed establishment in a Member State if they receive ancillary or additional services from a service provider in that Member State which contribute to the completion of sales made by the taxable person outside the EU but giving rise to taxable supplies of goods in that Member State.
ECJ Cabot Decision 29 June 2023
The ECJ ruling was based on the following rational
- The toll manufacturing services are rendered exclusively for Cabot Switzerland GmbH does not trigger a fixed establishment in Belgiu
- The toll manufacturing services should be distinguished from the sales by Cabot Switzerland GmbH.
- The same means cannot be used to both provide and receive the same services (confirmation of point 54 in the Berlin Chemie case).
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,
should be interpreted as:
a taxable person receiving services, whose head office is established outside the European Union, does not have a fixed establishment in the Member State in which the provider of the services concerned is established, legally distinct from this lessee, when the latter does not have an appropriate structure there in terms of human and technical resources that could constitute this permanent establishment, and this even when the taxable person providing services carries out for the benefit of this taxable lessee, in execution of an exclusive contractual commitment, contract work and a series of ancillary or additional services contributing to the economic activity of the taxable person in that Member State.
Why is Fixed Establishment important for foreign services VAT
Fixed Establishment means ‘any establishment… 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’ and ‘to enable it to provide the services which it supplies’.
Having a foreign VAT number in another EU state does not alone mean Fixed Establishment in the country.
The location of a BE or FE is important in determining the place of supply of services for VAT purposes. Most cross-border services supplied to businesses are now taxable on a reverse-charge basis meaning that it is the recipient rather than the supplier who accounts for the VAT on these [D44]. Therefore, in order to correctly account for the receipt of international services the place of receipt must be identified. The location of a BE or FE is important in determining the place of supply of services for VAT purposes. Most cross-border services supplied to businesses are now taxable on a reverse-charge basis meaning that it is the recipient rather than the supplier who accounts for the VAT on these [D44]. Therefore, in order to correctly account for the receipt of international services the place of receipt must be identified.
It is therefore important that any fixed establishments have sufficient substance and independence in terms of management structures etc. to qualify as establishments in their own right. It also demonstrates the VAT risk for suppliers since they are obliged to identify the place of establishment of the customer which permits them to zero-rate a cross-border supply.
