VGD Hungary is your expert partner

VAT establishment risk for intra-group supply of services

VAT establishment risk for intra-group supply of services

VAT establishment risk for intra-group supply of services


The recently published ruling of the European Court of Justice in Case C-232/22 once again deals with the VAT establishment risk associated with the supply of cross-border services (typically toll manufacturing) within a group of companies. The case concerns multinational groups in particular. Recently, there has been a growing trend for European national tax authorities to adopt the approach of determining a foreign establishment for the recipient of a cross-border services if the service provider agrees in contract to use its equipment and personnel almost exclusively for the recipient of the service. National tax authorities have regarded such economic dependence as sufficient to establish a VAT establishment. The European Court of Justice has recognised the legitimacy of this approach, but has already consistently held that there is no establishment on the basis of other factors (e.g. the liability of the supplier).

The judgment shows that the risk of creation of fixed establishment must be taken into account in the case of intra-group services where the service provider's capacity is committed almost exclusively in one direction (e.g. towards the parent company). In order to mitigate the fixed establishment risk, professionally drafted contracts with a crystal-clear delineation of responsibilities are needed to avoid clients having to defend their rights in legal disputes that take years and escalate to international levels.


The factual background of the judgment

Cabot Switzerland GmbH - one of the main operating companies of the Cabot-group – has a seat in Switzerland, and has a VAT-registration in Belgium. The company has concluded employment contracts with members of the Cabot-group, including the Belgian company Cabot Plastics. Under the contract, Cabot Plastics converts raw materials into products for the production of plastics in Belgium for the benefit and under the control of Cabot Switzerland, using only its own equipment. Almost all of Cabot Plastics' turnover is accounted for by services provided to Cabot Switzerland.

Under the contract, Cabot Plastics will store and transform the raw materials purchased by Cabot Switzerland on its premises. The transformed products are stored by Cabot Plastics until the goods have been sold by Cabot Switzerland to its customers. Transport of the goods is carried out by the customers or by external carriers engaged by Cabot Switzerland. In addition to the above, Cabot Plastics provides a several additional services under an exclusive contractual commitment to Cabot Switzerland.

In the case, the main question was does the service provider (i.e. Cabot Switzerland), - who is established in Switzerland - has a fixed establishment in Belgium, where one of the member of the group (i.e. Cabot Plastics) provides services with the supply of several additional services to the business activity of Cabot Switzerland in Belgium on the basis of an exclusive contractual obligation and taking into account the fact that the human and material resources used in Cabot Switzerland’s business activity are also provided by Cabot Plastics.

What the Court’s ruling is about?

Nevertheless the Court of Justice acknowledged that the  question of fixed establishment arises in the context of the above facts, concluded that The business activities of Cabot Switzerland do not create a fixed establishment in Belgium, since the company does not have an appropriate human resources and facilities which would create a fixed establishment from tax perspective, even though Cabot Plastics - as service provider -, carries out transactions on a contractual basis in the scope of an exclusive contractual obligation for Cabot Switzerland and provides several additional services which supports the business activity of Cabot Switzerland in Belgium.

We note that, a recent increase can be observed regarding the tax audits performed by certain national tax authorities in relation to group members where the subsidiary is located in a different country from the parent company and provides services exclusively to the parent company. The contractual relationship between the parent company and the subsidiary, furthermore the transactions carried out between the parties should be examined on a case-by-case basis in the light of the risk whether the parent company’s business activity creates a fixed establishment in the country where the subsidiary has been established or not.

In order to be compliant with the respective rules and to mitigate the significant risks, we recommend to perform the necessary contractual due diligence and fixed establishment related analysis at your earliest convenience in the case of the provision of services between subsidiaries and foreign parent companies. In case of request our professionals would be pleased to assist you during the due diligence and the fixed establishment related analysis.

Share this page: