Background
In the context of international trade, a “fixed establishment” is a place (other than the main head office of a business) that has the “human and technical resources” to make or receive supplies. This is relevant when looking at cross border services to determine where the supply is made from, where it is received and, therefore, where it should be taxed.
The Welmory case
In certain circumstances, it is possible for a fixed establishment to be created through a business’ relationship with a third party (e.g. if a business operates in a particular territory through a dependent agent). The CJEU was asked to consider whether a supplier had created a fixed establishment for its customer.
Welmory Limited (based in Cyprus) provided an auction website for customers to use to buy goods in Poland. The website was managed by Welmory Sp z.o.o (based in Poland). When Welmory Poland invoiced Welmory Cyprus for its website management services, it believed the services were received in Cyprus and, as a cross border supply, did not charge Polish VAT.
The Polish tax authorities disagreed, and argued that the supply should be liable to Polish VAT, because Welmory Poland acted as the “human and technical resources” of Welmory Cyprus, creating a fixed establishment for Welmory Cyprus in Poland. As a domestic supply, this would be liable to Polish VAT.
The CJEU confirmed the factors that are relevant when considering whether a third party can create a fixed establishment for another business. In particular, it noted that whilst Welmory Poland did indeed provide some business infrastructure for Welmory Cyprus, it did not do so in the context of enabling Welmory Cyprus to receive its own website management services.
It is for the Polish Courts to apply the CJEU decision to the facts of the case. However, it was noted that the webservers, software, key decision makers and the people able to conclude contracts were not based in Poland. If these facts are confirmed by the Polish court, then we would expect it to conclude that Welmory Cyprus does not have a fixed establishment in Poland and the supplies properly take place cross border.
What does this mean for other taxpayers?
The prospect of suppliers routinely creating fixed establishments for their business customers would be worrying for many international businesses, in terms of the level of complexity it would create. However, this CJEU case doesn’t really tell us anything new – there are circumstances in which the relationship between a business and a third party can create a fixed establishment but the nature of the infrastructure being provided (and in relation to which supplies) needs to be considered on a case by case basis.
If you would like to discuss the impact of this case on your business in further detail, please contact Julie Park on 0208 941 9200 or Julie.Park@thevatconsultancy.com.
