Where VAT is concerned the existence of a fixed establishment is of major importance when determining where a service is taxable. Entrepreneurs would do well to determine whether or not they have a VAT fixed establishment and to know when real estate or an asset might classify as such. On June 3rd, 2021 the European Court of Justice issued a ruling in the Titanium case (ECJ 03-06-2021 Titanium C-931/19). This ruling provides further information and clarifies criteria of the definition “VAT fixed establishment”. Below we will briefly outline the case itself, the ruling and the impact on current practice.

Facts and circumstances

The ECJ case covers the activities of a Jersey based company named Titanium Ltd, a company whose business was active in the real estate and housing sector. Titanium owned real estate in Austria (Vienna) which, as part of its commercial activities, was leased to two Austrian companies.  

Because Titanium had no staff of its own in Austria it authorized a local property manager to act as an intermediary, handle administration and prepare the VAT returns. Titanium retained control with respect to concluding rent and tenancy agreements, finance and upkeep of the property.

Titanium considered that in absence of staff the property could not constitute a VAT fixed establishment. Because of this no VAT was charged to the two Austrian tenants. These circumstances resulted in a case in which the existence of a fixed establishment was at issue. More specifically, whether or not the Austrian property and the staff provided by an authorized third party property manager were sufficient to qualify as a VAT fixed establishment of Titanium in Austria.   

The ruling of the ECJ

Earlier cases such as Planzer and ARO Lease provided a general outline of what constitutes a fixed establishment. A fixed establishment requires a ‘sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to provide the services which it supplies’. Following the judgement of the ARO Lease the ECJ concluded that a fixed establishment requires that the supplier has his own staff.

The ECJ ruled that Titanium does not have a fixed establishment in Austria as the facts and circumstances of Titanium’s case gave no reason to suppose the criterion of ‘own staff’ was met. The Court specifies that no fixed establishment exists in Austria due to the absence of ‘own staff’ which is furthermore charged with important decisions such as letting of the property. Titanium reserved the right to conclude tenancy agreements and let the property, as such the structure in Austria was unable to act independently and cannot be considered a fixed establishment.

Our vision and impact on current practice

The ECJ reiterates that the supplier’s own staff has to be present in order to assume a fixed establishment, but there is still some room to discuss and debate what qualifies as ‘own staff’. Would staff be considered ‘own staff’ if the staff of a third party was endowed with decision-making power, or can staff only be considered the suppliers own staff if it is directly employed? One can also ask if the ruling would have been different if the authorized third party had taken it upon himself to make key decisions. We regard these questions above as remaining unanswered because the definition ‘own staff’ wasn’t sufficiently clarified in the case at hand.   

The ambiguity surrounding the definition ‘own staff’ is also of concern to current practice. Discussion may arise in situations where a fixed establishment is currently said to exist, but which is operating (entirely) with staff capable of independent operational and managerial services provided by a third party. There is the possible risk that local tax authorities would argue that there is no fixed establishment because of the lack of directly employed staff. We are of the opinion that it is the nature of the services rendered and the power or competence of the staff which are decisive factors if such a discussion would arise.

As a final comment this ruling might be relevant for businesses that wish to establish a fixed establishment in other EU member-states. For these businesses it would be essential to check and see if the locally present staff qualifies as ‘own staff’ and what their power of authority entails. Possible disagreements over whether or not a fixed establishment is present can arise if this is not or not sufficiently clear. This could have an impact on your VAT position.

More information?

In case of any further questions regarding this newsletter, please contact your regular contact at RSM Netherlands.