This last Thursday, on 29 June 2023, the Court of Justice of the European Union (CJEU) published a judgment on the existence of fixed establishments in cases involving performance of toll manufacturing services (Cabot Plastics Belgium SA case C-232/22). This judgment paves the way for reimbursement of VAT invoiced to foreign entities, together with interest.

Who is impacted by the judgment?

• Entities providing toll manufacturing services
• Polish entities providing services to foreign taxpayers

This judgment is of interest primarily to Polish service providers invoicing their business partners with Polish VAT.

The conclusion of the CJEU judgment

"Article 44 of the VAT Directive and Article 11 of Implementing Regulation No. 282/2011 must be interpreted as meaning that a taxable person receiving services, whose business is established outside the European Union, does not have a fixed establishment in the Member State in which the provider of the services concerned – which is legally independent from that recipient – is established, where that recipient does not have a suitable structure in terms of human and technical resources capable of constituting that fixed establishment, even where the taxable person providing the services provides to that taxable person receiving services, pursuant to an exclusive contractual undertaking, tolling services and a series of ancillary or additional services, contributing to the business of that taxable person receiving services in that Member State."

The position taken by the CJEU

In its judgment, the Court emphasized that where a foreign entity avails itself of human and technical resources of a company that is legally independent from it, it may thereby be creating its own fixed establishment. For this to happen, however, the foreign entity must have immediate and permanent access to those resources as if they were its own resources. Nevertheless, according to the CJEU, the service provider in the case considered remains responsible for its own resources and provides its services at its own risk. Also, the resources cannot be used both to provide and receive the same services. In the case at hand, however, it is not apparent that it is possible to distinguish between the resources used for the tolling services and those used to receive them.

The CJEU also considered the question of existence of otherwise of a fixed establishment in the context of the nature of the services concerned. In this particular case, the services were performed on an exclusive basis for a member of the same group, and essentially consisted in toll manufacturing. In addition, the company concerned additionally rendered logistics services ancillary to tolling (such as management of the stocks of raw materials and finished products, and the preparation of orders before sending). As a result of this support, the service recipient was in a position to make taxable supplies of goods in the state of the service provider. In this context, however, the CJEU found that provisions of services of this kind have no bearing on the existence or otherwise of a fixed establishment.

In the end, the CJEU concluded that in light of the considered circumstances, the foreign company receives and uses the tolling services for the purposes of its business operations consisting in the sale of the tolling manufacturing goods in the state where it has its place of establishment because it does not have the relevant structure in the state where the service provider is established.

Background of the case

Toll manufacturing is generally assumed to be a service using materials provided by the client or the manufacture of finished products on orders from a client. Services of this kind are often provided together with additional, non-manufacturing services. In the case at issue, the Belgian tax authorities concluded that the Swiss entity concerned had established what is known as a fixed establishment in Belgium through the operations of a Belgian business. According to the Belgian authorities, the operations of the Belgian company, which manufactured products and provided logistical support for the sale of these products, coupled with the fact that the Swiss company was able to give instructions to the Belgian entity's employees, thereby effectively exercising control over the Belgian company's employees, resulted in the creation of a fixed establishment of the Swiss company in Belgium. The authorities also noted the services were being provided for a specific recipient on an exclusive basis and that both the service provider and service recipient were part of the same corporate group (although, admittedly, being legally independent of one another).

Consequently, the authorities concluded that the Swiss company should be considered as having a fixed establishment in Belgium, and thus treated as a local service provider. For this reason, invoices for the manufacture of products should include local VAT, and since no VAT was being invoiced by the service provider, this provider should be charged with tax arrears (to the tune of over ten million euro).

Fortunately for taxpayers, particularly for toll manufacturing service providers to foreign taxpayers, the CJEU disagreed with the Belgian authorities in this regard.

Consequences of the CJEU judgment

While the CJEU's ruling is not a source of law, it is nevertheless widely relied on in interpretations of tax laws. The best examples of interpretations of the definition of fixed establishment include the Polish cases of Welmora and Dong Yang and the Romanian case of Berlin Chemie AG, which triggered significant alterations in tax settlements of Polish taxpayers, especially service providers.

The judgment reviewed here is important for service providers, particularly toll manufacturers rendering services to foreign members of the same corporate group or other entities.

What benefits does the CJEU judgment bring?

The judgment is favorable to service providers. Depending on how they have been invoicing their clients, Polish taxpayers may now seek reimbursement of the VAT amounts paid to date (and the incorrectly understated amounts of input VAT resulting from the VAT declared on the relevant transactions), plus interest. To this end, invoices and invoice declarations issued for the previous years will have to be corrected. The judgment also opens the way to resumptions of past proceedings concerning the matter.