Analysis: “CJEU rules that a subsidiary of a company established in a third country does not constitute a fixed establishment per se” by Jordi Sol

On 7 May 2020, the Court of Justice of the European Union (CJEU) ruled that a subsidiary of a company established in a third country does not constitute a fixed establishment per se and that the supplier is not obliged to assess, when it does not have access to all the relevant information, the contractual relationship between those two entities.

The facts in Dong Yang Electronics (C-547/18) are:

Dong Yang, a company established in Poland entered into a contract with LG Display Co. Ltd. (Korea) (LG Korea) established in South Korea, for the provision of assembly services. The necessary materials and components, owned by LG Korea for the performance of those services, were cleared through customs and then supplied to Dong Yang by a subsidiary of LG Korea, LG Display Polska sp. z o.o. (LG Poland), a company established in Poland. Dong Yang supplied the result of his services to LG Poland which used them to produce TFT LCD modules. These modules, owned by LG Korea, were delivered to another company. Dong Yang invoiced its services to LG Korea as not subject to VAT in Poland. However, the Polish tax authorities took the view that the place of supply of the assembly services should be in Poland, on the ground that the real recipient of these services was LG Poland, a fixed establishment of LG Korea. The main question referred to the CJEU was whether LG Poland constitutes the fixed establishment in Poland of LG Korea.

In the reasoning of the CJEU it is worth highlighting the following:

The Court acknowledges (at paragraph 32), in line with DFDS (C-260/95), that a subsidiary could trigger the finding that there is a fixed establishment; however that this should be determined according to the material conditions established by Article 11 of the Implementing Regulation and not for the mere fact that the Korean Company has a subsidiary in Poland. With this the CJEU acknowledges that DFDS should still be considered when determining the existence of a fixed establishment. The case Welmory (C-605/12) should also be considered for this purpose.

Moreover, in this judgment the CJEU states that the obligation of the supplier, established in Article 22 of Implementing Regulation 282/2011, to run a check in order to identify the customer’s fixed establishment, refers only to the contractual relationship between the supplier and the taxable person to whom the service is provided and not to the contractual relations between that taxable person to whom the service is provided and an entity which may be identified, where appropriate, as his fixed establishment.

With this judgment, the Court clearly limits the scope of the supplier’s obligations in identifying the place of supply of services. Nevertheless, there is no clear statement on the assessment of a subsidiary as a fixed establishment of a parent company. In my view, after this judgment, there is still room in the future for disputes around the concept of fixed establishments.

The Opinion is accessible here (strongly recommended for its clear structure and the arguments given, though not all of them have been mirrored by the CJEU in its judgment).

The judgment is available here (not yet available in English).

Jordi Sol is an international VAT consultant.