EU VAT Fixed Establishment: Dong Yang Case Explained

A Korean electronics giant. A Polish assembly contractor. And a VAT that no one expected. This is a brief description of the dispute between Dong Yang Electronics, a Polish manufacturer, and the Polish Director of the Tax Administration Chamber regarding whether a subsidiary constitutes a fixed establishment of its foreign parent for VAT purposes. 

Besides examining the circumstances of the seemingly straightforward arrangement between Dong Yang and the South Korean company LG Display Co., Ltd., including its Polish subsidiary, for VAT purposes, the case also involves clarifying the rules of the Free Trade Agreement between the EU and South Korea. 

Background of the Case 

Dong Yang agreed to assemble printed circuit boards using LG Display's materials. While the contract was directly with the Korean parent company, the materials were physically delivered through its Polish subsidiary, LG Display Polska sp. z o.o., which served as the end user of the finished boards. The products produced by the LG Display Polska remained the property of the Korean parent company and were sent onward within the group.

Since Dong Yang considered that its services were supplied to a non-EU entity with no fixed establishment in Poland, it held that they are not subject to Polish VAT. Such a conclusion was reached based on the Korean company's assurance that it had no staff, property, or technical resources in Poland. However, the Polish Tax Authority thought otherwise, claiming that the Polish subsidiary effectively functioned as a fixed establishment of the Korean parent. Consequently, services were actually supplied in Poland and were subject to Polish VAT.

The Tax Authority concluded that the close operational and contractual links between the Korean parent company and its Polish subsidiary meant the latter was not acting independently, but rather as a local extension of the parent company. Additionally, it stated that Dong Yang should not have relied solely on the Korean company’s statement, but should have independently assessed who the real beneficiary of the services was.

Dong Yang challenged this reasoning and decision before the Regional Administrative Court. The company argued that the Tax Authority had wrongly applied EU VAT rules, particularly the provisions on the deemed supply of services and the definition of a fixed establishment.

After reviewing the ECJ's established case law on the concept of a fixed establishment, the Regional Administrative Court noted that those previous cases involved different factual situations. The key difference between previous cases and the one in question is that LG Display is based in South Korea, outside the EU, and therefore does not benefit from EU freedoms, such as the right of establishment. 

Given these circumstances, the Court noted that a non-EU company can operate in Poland only through a local subsidiary, such as LG Display Polska, and that it will typically have some degree of influence over it. This led the Court to question whether that structural relationship alone is enough to treat the subsidiary as a fixed establishment of the parent company for VAT purposes. With this and some additional doubts, the Court decided to refer two questions to the ECJ for a preliminary ruling.

Main Questions from Request For Ruling

With the first question, the Court asked ECJ whether the mere existence of a Polish subsidiary automatically means that a non-EU parent company has a fixed establishment in Poland for VAT purposes. 

If the answer to the first question is negative, the Court raised a second question: whether a service provider like Dong Yang is nevertheless required to look beyond formal structures and investigate the internal contractual arrangements between the parent company and its subsidiary to determine whether a fixed establishment exists in practice.

Applicable EU VAT Directive Article

ECJ outlined Article 44 of the EU VAD Directive, which sets the general rule that services supplied to a business are taxed where that business is established, with a notable exception when the services are actually provided to a fixed establishment of that business located in another country. Additionally, the ECJ noted that Articles 11 and 22 of the Implementing Regulation No 282/2011, which further elaborate on the concept of a fixed establishment, are important for this case.

Poland National VAT Rules

Article 28(b)(1) to (3) of the Polish domestic VAT, which sets out rules on the place of supply of services and largely mirrors the framework established under, was the vital provision for this case.

The Free Trade Agreement

In addition to the EU–wide VAT rules and relevant provisions of Polish VAT law, the ECJ also considered provisions of the Free Trade Agreement between the EU and South Korea, approved by the EU Council in 2010. The Free Trade Agreement, among other matters, governs how Korean investors operate in EU Member States, including Poland. 

Notably, Korea is generally prohibited from establishing branches in Poland, except for financial services. Furthermore, Korean investors may conduct business only through specific corporate forms, such as limited partnerships, limited joint-stock partnerships, limited liability companies, or joint-stock companies. In other words, under these rules, Korean companies cannot simply set up a branch as a fixed establishment in Poland. They must operate through a local subsidiary in an approved legal form.

Importance of the Case for Taxable Persons

Given that, in this case, ECJ interprets EU VAT rules and regulations on the concept of fixed establishment from a broader perspective that includes analyzing and interpreting the Free Trade Agreement between the EU and South Korea, the case carries significant practical weight for businesses operating across borders within and outside the EU. 

More specifically, this case touches on some of the most commercially sensitive questions in VAT law, such as whether a subsidiary can constitute a fixed establishment of the parent company, and to what extent the taxable person may be liable for due diligence regarding the agreements between a parent company and its subsidiary.

Analysis of the Court Findings

The ECJ clarified that Article 44 provides that, if the services are provided to a fixed establishment located elsewhere, taxation shifts to the location of that fixed establishment. The purpose of the relevant provision from the EU VAT Directive and Implementing Regulations is to prevent both double taxation and non-taxation by providing a clear reference point for where VAT is due. Determining whether a fixed establishment exists requires examining the entity receiving the services, that is, the customer itself. 

Under the Implementing Regulation, a fixed establishment is any place other than the main business establishment that has sufficient permanence and an adequate structure, including human and technical resources, to receive and use the services for its own needs. When determining whether a fixed establishment exists, the focus is on the operational substance of the establishment, not merely its legal form or registration.

While the EU- Korea Free Trade Agreement limits Korean investors in Poland to operating through certain corporate forms, the legal restriction does not automatically determine whether a subsidiary qualifies as a fixed establishment for VAT purposes. Nonetheless, even though a Korean company cannot conduct business in Poland, its subsidiaries may qualify as fixed establishments under the EU VAT Directive.

The ECJ added that, when determining the location of the customer’s fixed establishment, the supplier must first assess the nature and use of the services. If it is not possible to determine the location based on that data, the supplier should examine contractual documents, orders, and the customer’s VAT identification number to see if they point to a fixed establishment as the service recipient and payer. If, however, even these steps are not sufficient to identify the fixed establishment, the supplier can reasonably treat the customer’s main business location as the place of supply.

The ECJ and the Advocate General noted that investigating the contractual relationships between a non-EU company and its subsidiary in an EU country falls within the responsibilities of the Tax Authorities, not suppliers, and that the information is generally inaccessible to the supplier.

Courts Final Decision

In the end, the ECJ ruled that a service supplier cannot assume that a non-EU company has a fixed establishment in the EU country merely because it has a subsidiary there. Moreover, the supplier is not required to investigate the contractual relationships between the parent company and its subsidiary to make this determination.

Conclusion

This case should be viewed as offering more than clarifying that a subsidiary's mere existence does not automatically constitute a fixed establishment of its foreign parent company. The ECJ's ruling also draws a boundary between what Tax Authorities can demand of businesses and what is commercially realistic to expect from businesses. More specifically, it establishes that suppliers cannot be held responsible for investigating internal group arrangements they have no right to access. 

Source: Case C‑547/18 - Dong Yang Electronics sp. z o.o. v Director of the Tax Administration Chamber, Wrocław, Poland, EU VAT Directive, The Free Trade Agreement EU- South Korea, Implementing Regulation No 282/2011