ECJ Berlin Chemie Case: Key Ruling on Fixed Establishment for VAT in EU

The case of Berlin Chemie AG refers to a complex question of fixed establishment under the EU VAT Directive. The Berlin Chemie (BC) is a German-based company that sells pharmaceutical products in Romania and is registered for VAT in Romania. In addition, the BC is a 100% owner of the Romanian company Berlin Chemie A. Menarini SRL (BCAM).

The BCAM and BC signed a service contract regulating mutual obligations. The issue arose when the Romanian Tax Authority concluded that BC had a fixed establishment in Romania through BCAM, thus imposing the VAT liability on BCAM. Not agreeing with this, the BCAM disputed this decision.

Background of the Case 

The BC and BCAM concluded a marketing, regulatory, advertising, and representation services contract to define mutual obligations governed by German law. Under this contract, BCAM provides marketing and other services needed to promote BC's pharmaceutical products to Romanian customers.

Consequently, the BC must pay BCAM a monthly fee for providing services equal to the incurred expenses plus 7.5%. 

As a result of their cooperation and connection, the BCAM issued invoices to the BC without calculating VAT, as it considered that the place of supply was in Germany and not in Romania. More precisely, the BCAM and BC applied the reverse charge mechanism.

The Romanian Tax Authority thought otherwise, stating that the services are taxable in Romania, not Germany. Moreover, the Tax Authority argued that the BC had a fixed establishment in Romania because it met requirements such as having sufficient technical and human resources through its subsidiary. The Tax Authority concluded that BC had continuous access to BCAM personnel, computers, operating systems, and motor vehicles.

As a result of this conclusion, the Tax Authority issued a tax assessment to BCAM stating that it needs to pay more than RON 41 million, which is approximately EUR 8 million, for due VAT. The Tax Authority also imposed RON 5.8 million (around EUR 1.2 million) and RON 3.3 million (around EUR 709,000) in interest and late-payment penalties, respectively.

The BCAM submitted a request for the annulment of a tax assessment to the Court of Appeal in Bucharest (Court of Appeal, disputing the Tax Authorities' conclusion that the BC has a fixed establishment in Romania.

However, the Court of Appeal was uncertain how to interpret the provision from Article 44 of the EU VAT Directive and Article 11 of Implementing Regulation No 282/2011, further stating that the ECJ case law did not address similar issues. Therefore, the Court of Appeals turned to the ECJ and requested a preliminary ruling before making its final decision.

Main Questions from Request For Ruling

The Court of Appeals referred three questions to the ECJ to determine if BC had a fixed establishment in Romania due to access to BCAMs' human and technical resources. The first question was whether indirect control through ownership equals the direct control of resources necessary to establish a fixed establishment and VAT obligations.

The second question that needed to be clarified was whether a presumed fixed establishment needs decision-making authority over the supply of goods or whether VAT liability could arise if the BC has access to technical and human resources in the Member State through third-party contracts, in this case with BCAM, that have a direct influence on the volume of sales.

The final question that needed to be addressed to determine whether BC has a fixed establishment in Romania was whether BC's access to BCAM resources, as a subsidiary company, could prevent BCAM from being considered a separate service provider for VAT purposes.

Applicable EU VAT Directive Article

Article 44 of the EU VAT Directive and Article 11 of the Implementing Regulation No 282/2011 (Implementing Regulation) are critical for this case.

Article 44 defines the place of supply of services to another taxable person, that is, a B2B supply of services. As a general rule, the palace of supply is where the businesses receiving the services are established, meaning that the VAT is charged based on the location of the recipient's main business headquarters.

However, if the services are provided to a company's fixed establishment in a different location than the main headquarters, e.g., a branch office or subsidiary in another EU Member State, the place of supply is where the fixed establishment is located.

Suppose neither the main business headquarters nor the fixed establishment exists in the EU country where the service is provided. In that case, the palace of supply is determined based on the recipient's permanent address or usual residence.

Article 11 of the Implementing Regulation further defines what qualifies as a fixed establishment for VAT purposes under Article 44 of the EU VAT Directive by stating that the fixed establishment is separate from its main headquarters and must have the adequate structure of human and technical resources, such as employees, equipment, and facilities, that allows it to receive and use services independently.

Romania National VAT Rules 

Since the tax audit of the BCAM was conducted for the period between February 1, 2014, and December 31, 2016, and since the Romanian Tax Code was amended in that period, Article 125a(2)(b) of the Tax Code No. 571/2003 (Tax Code 2003), which was in force until December 31, 2015, and Article Article 266(2)(b) of the Tax Code No 227/2015 (Tax Code 2015) in force from January 1, 2016, stating that if a company has its headquarter outside Romania, it has a fixed establishment in Romania and is considered established in Romania for VAT purposes.

Also, Articles 133(2) of the Tax Code 2003 and 278(2) of the Tax Code 2015 are relevant for this case, as they have identical provisions relating to the place of supply of service to another business. Moreover, the stated articles regulate the same matter in the same manner as Article 44 of the EU VAT Directive.

Importance of the Case for Taxable Persons

The case is vital as it helps businesses better understand when their branches or subsidiaries are liable for VAT when providing or using services to or from their parent companies. Furthermore, the decision made by the ECJ, in this case, explains what is meant by having a sufficient degree of permanence and adequate structure of human and technical resources to receive and use services, which is crucial for fixed establishment.

It is common for international corporations to have subsidiaries and branch offices in multiple EU countries, and this case can help them understand when the fixed establishment rules apply to the parent company and when VAT liability is triggered.

Besides businesses, this case is essential for national governments and courts of the EU countries, as it provides guidelines on determining whether a fixed establishment exists.

Determining this has an incredible impact on the VAT liabilities and responsibilities of the companies operating across the EU.

Analysis of the Court Findings

The ECJ defined the questions it was asked as whether a company with its main office or headquarters in one EU Member State, in this case, Germany, can be considered to have a fixed establishment in another EU country, Romania, simply because it owns a subsidiary there. Therefore, the ECJ focused on whether the BCAM, as a subsidiary, fulfills the criteria for a fixed establishment. 

The ECJ concluded that Article 44 of the EU VAT Directive and Article 11 of the Implementing Regulation do not specifically define if the resources must be owned outright by the company receiving the services and that both articles simply require that a fixed establishment have "sufficient permanence" and a "suitable structure" of human and technical resources.

Furthermore, the ECJ stated that for a subsidiary to be considered a fixed establishment, the parent company must have continuing access to the necessary personnel and equipment through contracts that give it similar control as ownership would. Nevertheless, the ECJ stated that applying a too-restrictive standard would increase legal uncertainty and create more complex VAT compliance.

The main issue is, therefore, whether a BC has consistent, long-term access to necessary resources through its subsidiary. By examining the facts presented, the ECJ concluded that it is apparent that BC did have long-term, uninterrupted access to BCAM resources, including 200 employees, computers, and vehicles. 

The ECJ left it up to the national court to determine whether the BA had direct control over these resources and used them as if it owned them or whether the BCAM acted independently.

Although the BA owns the BACM, the BCAM's role is limited to promoting BC products, taking orders, and forwarding them without actually selling or committing to third-party agreements on behalf of BC. This means that BCAM services are separated from BC's core business, which is the sale of pharma products.

From there, the ECJ concluded that BCAM, as a subsidiary, supports BC's operation, that the resources provided are used to provide service to BC, and that it does not present a standalone structure that BC could independently utilize.

Courts Final Decision

In its final remark relating to this case, the ECJ stated that for VAT purposes, a fixed establishment in an EU Member State requires a company to have a stable structure in that Member State, with both human and technical resources that it can control and use independently for its business activities.

Although BCAM provided service strictly and exclusively to BC, its parent company, which helped drive BC's sales, this does not mean BC has a fixed establishment in Romania.

In the end, for the fixed establishment to exist, the BC must have had control over necessary resources and could use them as if they were its own, which was not the case with the BC and BCAM.

Conclusion

This is not the first ECJ ruling on fixed establishments. However, none of the previous rulings clearly interpreted and clarified the fixed establishment for VAT purposes when a subsidiary provides services to the parent company unrelated to the latter's core businesses. 

By affirming that the subsidiary's provision of services to parent companies does not automatically create a fixed establishment, the decision provided the necessary context for national courts and businesses, especially international companies. The decision highlights the importance of control over technical resources and human capital to establish VAT obligations.

Two years after the decision, the ruling remains relevant for companies involved in cross-border transactions within the EU, ensuring that the same principles are consistently applied. The ECJ's explanation ensures a consistent approach across the EU, minimizing potential discrepancies in the application of rules relating to fixed establishment from one EU country to another.

Source: Case C-333/20 - Berlin Chemie A. Menarini SRL v Administrația Fiscală pentru Contribuabili Mijlocii București, EU VAT Directive, Implementing Regulation No 282/2011