EU: Increased risk of fixed establishment for VAT purposes
13 February 2020
The EU value added tax (VAT) changes referred to as the “VAT quick fixes” relate to call-off stock arrangements, chain transactions, and the exemption for intra-Community supplies of goods.
An aspect less discussed but not less important, connected with the changes relating to the call-off stock arrangements, is the possible creation of a VAT fixed establishment in another EU Member State. This issue is mentioned in the European Commission’s explanatory notes on the VAT quick fixes by integrating the guidelines agreed by the VAT committee.
VAT committee guidelines
In general, the VAT committee guidelines provide a business is said to be established for VAT purposes in another EU Member State if the warehouse where the call-off stock is to be located is owned (or rented) and directly run by the supplier with its own means present in that EU Member State.
Although neither the explanatory notes nor the VAT committee guidelines are legally binding, they may be used to better understand the new rules concerning, for example, call-off stock arrangements or, more generally, the direction of certain VAT matters. This issue also has appeared in the area of corporate taxation, when the operation of a business via a warehouse may increase the risk of creating a permanent establishment.
Local guidelines follow the approach
EU Member States are free to not follow the guidelines. However, it has been observed that with regard to the specific case of the fixed establishment created through a call-off stock warehouse, certain countries (the UK and Ireland) have recently released their own local guidance based on the guidelines.
Looking back on the past few years, tax authorities have become increasingly preoccupied by this subject, and the assessment of VAT fixed establishments has increased. For the specific case of warehouses, the domestic law in some EU Member States already includes provisions in respect of the risk to create a VAT fixed establishment.
Analysis on a case-by-case basis
The new approach of the VAT committee has come a long way since its working papers from 2014 and 2015 (WP no. 791 and 857) when the concept of “fixed establishment” was seen as irrelevant for the purposes of determining the place of supply of goods and when the mere existence of a warehouse in an EU Member State was not considered as a fixed establishment in that jurisdiction.
To conclude, the concept of VAT fixed establishment needs further refinement. Business models involving stocks held in warehouses across the EU need to consider looking at the situation on a case-by-case basis, starting from the basic definition given by the EU VAT Implementing Regulation together with the local provisions and followed by the principles enacted by the Court of Justice of the European Union in its judgments (that often use a rationality test—the fixed establishment alternative has to be applied to the extent that the reference to the place where the person established its business would not give rise to a “rational result” for VAT purposes).
Read a February 2020 report prepared by the KPMG member firm in Switzerland