Another issue addressed in the case was the obligation for service providers to analyze the contractual relationship between non-EU beneficiaries of the services and their subsidiaries in order to determine whether the beneficiaries can be considered as having a fixed establishment on EU territory.

The Court has ruled that, under certain conditions, a subsidiary may have the status of a fixed establishment for the parent company. However, the existence of an FE cannot be inferred from the mere fact of having a subsidiary within the EU.

Nevertheless, third party service providers are not required to carry out an analysis of the contractual relationship between the parent companies and their subsidiaries in order to determine whether a fixed establishment exists within the EU.

The Court’s arguments and the conclusions of the case

The CJEU emphasized that the existence of an FE cannot depend solely on the legal form of an entity. Within such analysis, the fundamental criterion should be whether the material conditions laid down in Article 11 of Council Implementing Regulation (EU) No 282/2011 are met, which must be assessed in the light of economic and commercial reality.

However, provided that a subsidiary fulfills the criteria set out in Article 11 with respect to the existence of a "sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive, use and provide services", it may constitute an FE for the parent company.

With regard to the obligation of suppliers to carry out an analysis of the contractual relationship between the parent company and its EU subsidiaries in order to determine the existence of an FE, the Court referred to Article 22 of Council Implementing Regulation (EU) No 282/2011, which provides some criteria that should be followed in order to determine whether the services are provided to an FE.

Specifically, service suppliers should examine the nature and use of the service provided to taxable persons. However, should an FE of the beneficiary not be identified as a result of such examination, it must be ascertained whether the contract, the order form and the VAT registration number assigned to the beneficiary and communicated to the supplier identify an FE as the recipient of the service and whether the latter performs the payment for those services.

Where the above criteria do not make it possible to identify an FE of the beneficiary, the supplier may legitimately consider that the services have been supplied at the place where the beneficiary has established its place of business.

Given the above, the Court has ruled that service providers are not required to carry out an analysis of the contractual relationship between the parent companies and their subsidiaries in order to determine the existence of a FE on the territory of the EU.

KPMG comment

The judgment of the Court in the case of Dong Yange Electronics (C-547/18) provides important clarifications with regard to the existence of an FE as a result of owning a subsidiary in a particular Member State, but also with respect to the lack of obligation of service providers to examine the nature of the contractual relationship between the beneficiaries of the services and their subsidiaries. Given the difficulties encountered in practice by service providers in performing the above mentioned analysis, the clarifications provided by the CJEU are encouraging.

However, given that the CJEU has not ruled out the possibility of a subsidiary being an FE for the parent company under certain conditions, it may be necessary for companies which have subsidiaries within the EU to carry out a detailed analysis of this issue. .

Nevertheless, the term ‘fixed establishment’ does not only play a role in determining the taxability of a service, but is also relevant for international supplies of goods. One of the ‘quick fixes’ that took effect as of 1 January 2020 is the simplification of the VAT treatment of call-off stock that a taxpayer holds in another EU Member State. However, this simplification does not apply if the supplier has a fixed establishment in the country where the call-off stock is located. A question that is often raised in practice is whether maintaining a local supply of stocks results in the presence of a fixed establishment, and that question is not always easy to answer. We, therefore, recommend that you analyze this carefully.