Fixed Establishment for VAT purposes

Clarity urgently needed on the concept of Fixed Establishment

Luc Dhont, Chair of the Legal & Taxation Committee, on behalf of the VAT Subcommittee

An EU VAT regulation has defined a Fixed Establishment (FE) for VAT purposes as “any establishment characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources”. This concept is not the same as a Permanent Establishment for direct tax purposes.

The existence of an FE becomes relevant when the customer and supplier of services are based in different countries.

The general rule for VAT purposes is that the place of taxation is where the customer is established. If the supplier and B2B customer are established in different countries, this is deemed a cross-border supply with no VAT being charged on the invoice. However, if the customer is deemed to have an FE, as a non-resident, in the country of the supplier, the place of supply of services is shifted to the country of the supplier. In that case, the supply of the services is subject to VAT in the supplier’s country.

The impact (and risk) is that tax authorities are retroactively claiming VAT from the supplier, with interests and penalties, which is a cost for businesses – contrary to the “principle of neutrality”, i.e. VAT should not be a cost for businesses, as it is a tax on consumption.

Due to the retroactivity, the high interest rate in Belgium on late payment of VAT (9.6%) and the penalties due, a successful claim of an FE by the tax authorities can lead to a cost many times higher than VAT.

If the customer has the right to fully recover VAT, the VAT due in case there is an FE is nothing more than a roundtrip of cash: the supplier charges VAT to the customer and pays VAT to the tax authorities, and the customer pays VAT to the supplier and recovers the VAT from the tax authorities.

Since the mid-1980s, the European Court of Justice (CJEU) has dealt with several cases to clarify and interpret the concept of an FE. The Belgian Government informed the Court of Justice in 1997 that it adhered to the definition of the concept given in the CJEU’s case law. The Belgian Government is also bound by the definition implemented in the EU VAT Regulation.

Nevertheless, given new business models, the concept of an FE in Belgium is increasingly causing issues with tax authorities upon audit. This has led and is still leading to several court cases in Belgium, with huge amounts of interest and penalties being charged.

The only reason this issue exists is the lack of a solid and easily understandable set of guidelines on the definition of an FE. These guidelines should make it clear whether or not a company has a Fixed Establishment outside the country where it has its place of business.

A typical argument of tax authorities to claim an FE is that a non-established entity has an FE in their country through the employees of a resident company, which is providing services to the non-established entity, even if those employees are not the “own” personnel of the non-established entity.

Belgium issued a circular on Fixed Establishments in 2003. AmCham Belgium urges the Belgian tax authorities to issue an updated circular, which takes into account the principles applied by the European Court of Justice in recent cases and provides legal certainty and a set of simple-to-apply and simple-to-interpret rules on the determination of whether a non-established entity has an FE in Belgium or not. For instance, the Belgian tax authorities should embrace the conclusions of the recent CJEU Case C-931/19 Titanium, stating that there is no FE if the non-established entity does not have its ‘’own personnel’’ in a given country.

Proper guidance is essential and should be provided as, for example, the Dutch Secretary of State did in December 2020.

About our VAT Subcommittee

The VAT Subcommittee monitors VAT-related developments and works with the Belgian authorities to make the country's VAT system as business friendly as possible. The Subcommittee also follows developments related to Brexit and relevant initiatives at the EU level.