CJEU rules toll manufacturer is not a fixed establishment for VAT purposes

On 29 June 2023, the Court of Justice of the European Union (CJEU) issued its decision in case C-232/22 (Cabot Plastics Belgium). In this decision, the CJEU applied the concept of a fixed establishment for VAT purposes to a Belgian toll manufacturer rendering tolling services to its principal that was not established in the EU.

In its ruling, the CJEU decided that the non-EU principal does not have a fixed establishment for VAT in Belgium through the human and technical means of its affiliate Belgian toller.

In its considerations, the CJEU particularly indicates that the fact that the toller and the principal company are related entities, is not relevant in this respect. Also, the fact that the toller renders the services exclusively to the principal does not alter the conclusion. Importantly, the Court repeats that the supply of the services to the principal company needs to be distinguished from the supply of goods by that principal company, and that this subsequent supply of goods does not impact the fixed establishment analysis.

This clear and well-reasoned decision will hopefully bring legal certainty for all groups having toll manufacturers.

Background and facts of the case

A Belgian established company performs tolling and ancillary services for a Swiss group company (Swiss principal). The raw materials are purchased by the Swiss principal and are shipped to Belgium to undergo the services. These services consist of the processing of raw materials at the Belgian toller’s premises into finished products that are used for the manufacturing of plastics. Once the tolling process is finalised, the finished products are stored at the premises of the Belgian toller before being shipped and sold to the Swiss principal’s customers in Belgium and abroad.

The Belgian tax authorities were of the opinion that the Swiss principal has a Belgian establishment characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources (i.e., through the Belgian toller) to enable it to receive and use the tolling services for its own needs (i.e., sales from Belgium). As a result, the tax authorities argued that the Swiss principal has an inbound fixed establishment for VAT purposes at the toller’s premises in Belgium.

The Belgian toller disagreed, arguing that the Swiss principal does not have such a fixed establishment in Belgium.

Relevance of the decision: place of supply

Under article 44 of the EU VAT Directive, the general rule is that the place of supply of business-to-business (B2B) services is located where the recipient of the services is established, unless the services are provided to a fixed establishment of the recipient located another country, in which case the place of supply of the B2B service is the location of that fixed establishment. Based on these principles:

• If the Swiss principal had a Belgian fixed establishment and this establishment was considered to be the recipient of the tolling services, the services rendered by the Belgian toller would be deemed to be located in Belgium for VAT purposes and would be subject to Belgian VAT.
• If the Swiss principal did not have a Belgian fixed establishment or this establishment was not considered to be the recipient of the services, the tolling services rendered by the Belgian toller would be deemed to be located in Switzerland for VAT purposes, and would be outside of the scope of Belgian VAT.

After Liège's Court of First Instance ruled in favor of the Belgian tax authorities on 14 January 2020 (18/1759/A), the case was referred to the CJEU by the Liège Court of Appeal on 18 March 2022.

The CJEU was asked to determine whether a principal located outside the EU can have an inbound fixed establishment through the use of a tolling business established in the EU. 

The Liège Court of Appeal requested that the CJEU consider the following key elements:

• The non-EU principal and the EU toller are separate and legally independent entities but form part of the same corporate group.
• The EU toller contractually undertakes to use its equipment and its staff (almost) exclusively in producing finished products for the non-EU principal, and for a series of services that are strictly ancillary or additional to the tolling services.
• The finished products are then sold by the non-EU principal from Belgium, with the EU toller providing logistical assistance.

Consideration of the case by the CJEU

General

The CJEU has reconfirmed that the most appropriate point of reference for determining the place of supply of B2B services is the place where the recipient has established its business.

The CJEU clarifies the notion of a fixed establishment for VAT purposes by referring to article 11 of Council Implementing Regulation (EU) No. 282/2011, which provides that a fixed establishment for VAT purposes refers to any establishment, other than the place of establishment of a business referred to in article 10 of the regulation, characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs.

Following settled case law, the CJEU breaks down this concept into two main conditions:

• Condition one: The fixed establishment must have a sufficient degree of permanence and a suitable structure in terms of technical and human resources.
• Condition two: That suitable structure in terms of human and technical resources should enable it to receive the exact services supplied to it and to use them for its own business needs.

Application to case C-232/22

With respect to condition 1: The CJEU confirms that the toller remains responsible for its own resources which are used to provide services to the principal. The fact that a contract has been concluded between toller and principal whereby the toller contractually undertakes to use its equipment and its staff (almost) exclusively in producing finished products for the principal does not have the effect that the resources of the toller become those of the principal.

With respect to condition 2: the CJEU makes a distinction between (I) the supply of the services provided by the toller to the principal and (II) the sale of goods by the principal company. According to the CJEU, it is necessary to identify the place where the human and technical resources used by the principal to perform the contractually agreed services are located. However, based on the facts provided to the Court, it is not possible to distinguish the human and technical resources used by the toller for its contractual services and the resources used by the principal. The CJEU is of the opinion that the principal therefore does not have an appropriate structure in Belgium.

The Court confirms that the fact that the toller also supplies ancillary services, thereby facilitating the economic activity of the principal, such as the sale of products resulting from the contract work, has no impact on the question of the existence of a fixed establishment of that principal. Furthermore, the fact that the economic activities of companies contractually bound by an agreement for the provision of services whereby those activities essentially benefit consumers in the Member State in which the service provider has its registered office, is not relevant for determining whether the recipient of those services has a fixed establishment in that Member State.

The CJEU has ruled that the tolling services provided by the Belgian entity do not give rise to a fixed establishment for the Swiss principal.

This case follows the Berlin Chemie case (C-333/20) where the CJEU has provided more guidance on the circumstances in which the human and technical resources of an independent legal entity could result in a fixed establishment. The judgement in the current case gives additional insight on the relationship between the toller and the principal company, which according to the Court is not relevant when assessing if there is a fixed establishment. 

Implications of the decision

Considering the increased focus from tax authorities across the EU with respect to fixed establishments for VAT purposes, this CJEU ruling has been keenly awaited.

As the questions asked have been very specific, the immediate impact will be mainly for groups involving toll manufacturers.  However, by repeating principles laid down in earlier case law and further clarifying the concept of a fixed establishment, this decision is expected to bring more legal certainty for all multinational groups performing economic activities through established subsidiaries.

On a Belgian level, this decision will hopefully bring a conclusion to the different cases involving toll manufacturers. It remains to be seen how the Belgian tax authorities will deal with this judgement in other cases with different facts and circumstances and more specifically, in the announced circular letter which is expected to be published shortly.