From this article, you will learn:

  • On the basis of what premises the Polish tax authorities and courts recognize that a permanent place of business has been established?
  • How the judgment of the Court of Justice of the European Union can be used by taxpayers in disputes with the tax office?
  • Whether close cooperation with a Polish service provider has to lead to the creation of a permanent place of business for a foreign entity?

On 29 June 2023, the Court of Justice of the European Union issued a judgment that is important for taxpayers. It ruled that if a company purchases from an affiliated entity from another country comprehensive production services on entrusted materials, along with a number of accessory or supplementary services, this does not result in the creation of a permanent place of business in the country of the service provider's seat.


What is the significance of the EU judgment for entities operating in Poland? It seems that thanks to it, Polish tax authorities should not absolutely and in every situation demand payment of Polish VAT  from entities providing production services for a foreign related entity on entrusted materials. The judgment of the CJEU also contains other important guidelines that should be taken into account when analyzing the establishment of a permanent establishment.


Cabot Plastics case (C-232/22) – how did the EU court interpret the fixed establishment?

Facts: how affiliated entities cooperated with each other

The Tribunal examined the case of a Belgian company (Cabot Plastics), which provided production services from materials entrusted to it by a Swiss affiliate (Cabot Switzerland). The services provided by Cabot Plastics to the Swiss company accounted for almost all of its turnover. It is worth mentioning that Cabot Switzerland was registered for Vat in Belgium.

Cabot Plastics used its own equipment to process the raw materials, however, it did so under the direction of Cabot Switzerland. The contract concluded between them indicated that Cabot Plastics equipment would be used on an exclusive basis.

In addition, the Belgian entity stored raw materials and finished products in its premises, some of which were then sold by Cabot Switzerland in Belgium. The products were collected from these premises by the customers (or by external carriers used by the Swiss company). Importantly, some of the buyers of the goods were Belgian entities. In addition, Cabot Plastics provided Cabot Switzerland with a number of additional services - such as product management, issuing recommendations aimed at optimizing the production process, internal and external technical inspections and assessments, or supplies or services necessary for other production units.


The beginning of a dispute over a permanent place of business

During a tax audit the Belgian tax authority found that Cabot Switzerland had a fixed establishment in Belgium and, according to VAT regulations, the place of supply of production services should be Belgium. Therefore, the tax authority issued a decision imposing on Cabot Plastics the obligation to pay additional VAT, together with interest for late payment and an appropriate fine.

The Belgian authorities considered that Cabot Plastics’ services were provided to a fixed establishment which, in their view, Cabot Switzerland had in Belgium. 

According to the authorities, the production plants, distribution center and storage facilities that belonged to Cabot Plastics should be considered as made available to Cabot Switzerland - and the Cabot Plastics equipment itself was used only for and on the basis of the instructions of the Swiss company in such a way that it could actually use it freely dispose of. Moreover, the Belgian tax authorities argued that the personnel resources of the Belgian company may be used by the Swiss entity as its own. Finally, the authorities also considered that the structure put into use by Cabot Plastics allowed the services provided by that entity to be received and used. 


Decision: The CJEU disagreed with the tax authorities and ruled that Cabot Switzerland did not have a fixed establishment (FE) in Belgium

Some of the Court's important observations include:

  • FE will not arise solely because the service provider and the service recipient are related entities - or due to the fact that the service provider provides services on an exclusive basis and obtains the vast majority of its revenues from this cooperation;
  • The creation of the FE is not affected by the fact that the goods produced with the help of a service provider in Belgium are subsequently sold in the same country by a Swiss company;
  • The fact that a service provider also provides extensive support services to a related customer (such as product management, making recommendations to optimize the production process, internal and external technical inspections and assessments, or supplies or services necessary for other production units) does not affect the issue of the existence of the FE;
  • The same technical and personnel facilities located in Belgium and recognized by the Belgian tax authorities as constituting the FE cannot be used simultaneously to provide and receive the same services.

Learn more about Permanent and Fixed Establishment risk-check

Fixed Establishment – FE – disputes with tax authorities in Poland

Cases similar to the above have already been the subject of tax disputes in Poland. The decisions made during these proceedings were not always favorable to taxpayers, and the authorities and some courts presented a much more pro-fiscal position than the CJEU in its ruling on Cabot Plastics.

For example, the Provincial Administrative Court in Gliwice, in its judgement of 28 April 2021, file ref. I SA/Gl 1706/20, investigated the case of a German company that planned to conclude a contract for the provision of services in close cooperation with a Polish company in which it holds 100% of shares. According to the Provincional Administrative Court, the German company established a permanent place of business in Poland

The court's decision was the fact that the German entity held 100% of shares in the Polish subcontractor company. The Provincial Administrative Court in Gliwice also referred to the fact that a German company may provide instructions to a subcontractor, and its activities are subject to the complainant's acceptance and control. In the opinion of the court, the fact that the same resources are used in Poland both for the provision and reception of services did not constitute an obstacle to the establishment of the FE.

A similar position was presented in the interpretation of 10 August 2020, ref. no. 0114-KDIP1-2.4012.185.2020.2.JŻ. The Director of the National Smart Specialization stated in it that FE in Poland is owned by a Dutch company for which services on entrusted material are provided by a Polish related entity. The argument for the existence of FE was e.g. the fact that the production of goods took place only in Poland and the cooperation was planned for an indefinite period. In addition, the court pointed out that the services provided by the Polish company on entrusted materials must comply with the guidelines of the Dutch company, and the decisions made in the country of its registered office (Netherlands) actually concern the activities conducted in Poland in the field of processing goods and their distribution.

However, the Provincial Administrative Court in Warsaw looked at the above case differently and in its judgment of 16 June 2021, ref. no. III SA/Wa 2073/20 repealed the interpretation and determined the lack of FE in Poland for the Dutch company. The court emphasized that the performance of the goods on the basis of the ordering party's specifications cannot determine the possession of any control over the service provider and its resources. In the opinion of the Provincial Administrative Court, drawing a conclusion about the existence of control over the company's personnel and technical facilities only on the basis of establishing cooperation and manufacturing goods in accordance with the service provider's guidelines is, in the opinion of the Provincial Administrative Court, illogical and unsupported by case law.

A similar case was settled by the Provincial Administrative Court in Olsztyn in the judgment of 14 December 2022, ref. no. I SA/Ol 472/22. The dispute concerned a taxpayer who provided services to a foreign related entity. The court confirmed that a foreign entity has an FE in Poland, i.a. due to the very wide range of services purchased from the related company, the permanent and long-term nature of the contract and the use of the technical and personnel facilities of the related company. The court additionally pointed out that the services purchased in the country do not have to be characterized by a high degree of complexity and labour-intensiveness - they can even be simple activities that are crucial for the functioning of a foreign company.

Therefore, the issue of FE still leaves many doubts and often means that taxpayers have to assert their rights before administrative courts. As it turns out, with varying degrees of success. Each case requires a thorough, individual analysis . However, the new judgment of the CJEU may prove to be a valuable guideline for taxpayers and a strong argument in the event of a dispute with the tax authorities.