Austria: No fixed establishment for VAT purposes, foreign person without Austrian staff (CJEU judgment)

The Court of Justice of the European Union (CJEU) in a case addressing under what conditions a foreign taxable person has a fixed establishment in Austria for value added tax (VAT) purposes, held that such a foreign person that does not have its own staff in place in an EU Member State does not have a fixed establishment for VAT purposes in that EU Member State.

The case is: Titanium Ltd. (no. C-931/19, 3 June 2021)

The taxpayer (a company established on Jersey) engaged in activities including the renting or leasing of property. The taxpayer then rented VAT-taxed property it owned to two Austrian VAT-able persons. The management of the property was outsourced to an Austrian property manager that performed support and management activities with respect to the property.

The taxpayer did not charge any Austrian VAT on the rents it received, believing that the rented property in Austria was not a fixed establishment for VAT purposes because the taxpayer did not have its own staff in Austria. Absent such a fixed establishment, the VAT liability is reverse-charged to the Austrian tenants.

However, the Austrian tax authorities took the position that the property was in a fixed establishment in Austria and that VAT was to have been charged to the tenants because the reverse-charge mechanism does not apply.

The referring Austrian court asked the CJEU for a more detailed interpretation of the term “fixed establishment” and specifically requested whether the fixed establishment concept must involve the use of a taxpayer’s own staff and technical resources (which the property management company in Austria did not possess) or whether there can also be a fixed establishment without the deployment of one’s own staff (but with the aid of the services of a property manager).

Because the concept of fixed establishment has been interpreted in such a way that there must be a certain degree of permanence and an appropriate structure of human and technical resources to perform or receive services, the referring court noted it was not clear whether there must be both characteristics—staff and technical resources—or whether that is only necessary when the business activity is not possible without staff and technical resources.

In a substantially similar case in the Netherlands, the Dutch Supreme Court confirmed in a February 2019 decision that the rental holiday home of a foreign owner alone was not to be regarded as a fixed establishment for VAT purposes. Rather, the Dutch Supreme Court noted that there would only be a fixed establishment if the landlord also had the personnel and technical resources in the Netherlands to draw up rental contracts or to make day-to-day management decisions. Using the services of an independent intermediary when renting property alone could not result in the landlord having a fixed establishment for VAT purposes.

The CJEU explained that under settled case law of the CJEU, a fixed establishment must for VAT purposes have a certain degree of permanency by having permanent human and technical resources necessary for certain services. Thus, there must be a certain degree of permanence and an appropriate structure—in terms of staff and technical equipment—to enable the services at issue to be performed (or procured) independently.

The CJEU emphasized that a structure that does not have its own staff cannot fall within the scope of the concept of a fixed establishment. According to the CJEU, a building for which there is no staff available so that it cannot act independently does not meet the criteria to be regarded as a fixed establishment.

Tax professionals have observed that the CJEU reached a clear conclusion—one that is consistent with the Dutch Supreme Court’s judgment from 2019. In practice, there could be an issue as to the definition of what constitutes “own staff.” Some believe that this term may include “hired staff.” What may be critical is whether a VAT-able person has staff at its disposal with a certain degree of permanency (that is, even if the staff is not directly employed but is hired on a permanent basis).

In the case from Austria, one factor was that the rental activity could not take place locally without staff. What does this mean for whether a technical infrastructure can qualify as a fixed establishment when no staff is required to perform services independently? The answer to this question is becoming more important due to the ever-increasing digitalization of the economy. Although the CJEU emphasized the importance of the taxpayer’s own staff, the CJEU stated that a building cannot act independently without staff. Some believe that it could have been a different outcome if there were a technical infrastructure that could act independently without staff.

Tax professionals have further observed that other EU Member States are quicker to conclude that a fixed establishment exists and that the concept of fixed establishment for VAT purposes is constantly evolving. For instance, in July 2020, a Romanian court sought a preliminary ruling from the CJEU about the fixed establishment concept. The CJEU has not yet issued a judgment in that case.

The definition of fixed establishment is also increasingly being amended and tightened in other taxes, such as corporate income tax, with an aim of achieving an appropriate division of the authority to tax between countries and to better reflect developments in the areas of e‑commerce and the digital economy.

Read a June 2021 report prepared by the KPMG member firm in the Netherlands