I have read many opinions of Advocate General Kokott over the past few years. And I have agreed with most of them, particularly her opinions on the «Danish cases,» which, inexplicably, the Court of Justice did not follow. For those interested in these cases, I wrote about them with my colleague Diego Arribas here and here. But I will start this post by repeating that Ms. Kokott’s comments on the lack of democratic legitimacy of the OECD recommendations should be taught in the first year of law studies throughout the European Union.
Moving from the direct tax field to the VAT world, she recently drafted her opinion on Case C‑547/18 (Dong Yang Electronics Sp). In the Dong Yang case, she studies whether the Korean company LG Electronics should be treated as having a VAT fixed establishment in Poland, because its Polish subsidiary provided coordination services under an assembly contract signed between the Korean parent company and a third-party Polish manufacturer.
The consequences of this debate are far reaching: if the Polish LG company’s involvement triggered the existence of a fixed establishment, the third-party manufacturer must add VAT to its invoices addressed to the Korean parent company, as the services would be supplied in Poland under the standard B2B place of supply rule of article 44 of the VAT Directive.
AG Kokott’s conclusions could not be clearer: under the VAT Directive, an autonomous subsidiary cannot be regarded a fixed establishment of its parent company. For the concept of fixed establishment set out in the VAT Directive to apply, a single taxable person must operate in two different places. A parent company and its subsidiary are not a single person, but two persons; therefore, their tax treatment cannot be based on the concept of fixed place of business.
When grounding her opinion, AG Kokott relies not only on the literal interpration of the VAT Directive, which clearly defines the fixed establishment concept as being part of a single company, but she also stresses the overriding importance of legal certainty for the supplier, as its tax obligations would change if, suddenly, independent domestic companies were converted into fixed establishments of their foreign parent companies.
Ms.Kokott is aware of the DFDS judgment (C260/95, EU:C:1997:77), in which the court ruled that services provided by a tour operator through the mediation of a company operating as an agent are liable for VAT in intermediary’s Member State. But, in her view, DFDS cannot be considered a valid precedent allowing local subsidiaries to be considered fixed establishments of their foreign parent companies, for several reasons:
The DFDS case specifically concerned the tour operator sector, subject to a special VAT regime.
In DFDS, the local subsidiary provided selling services, acting as an intermediary of its parent company; while in the Dong Yang case, the local subsidiary does not provide selling services.
DFDS concerned the place where services are provided, while Dong Yang relates to the place where services are received.
Ms. Kokott reminds us that in the Daimler judgment the Court of Justice had already deviated from its previous DFDS doctrine as a way of protecting the higher value of legal certainty.
Currently, nobody wants to be accused of opening the door to aggressive planning techniques. Ms. Kokott is aware of this and concedes that a company could be regarded a fixed establishment in exceptional situations, where groups of companies design contractual structures aimed to infringe the prohibition of abusive practices. But she insists that this exception must be interpreted narrowly, particularly taking into account the right of deduction of the parties involved in the transaction. When the recipient of the services is a company fully entitled to VAT recovery, the tax collection is not at risk and abuse must be ruled out.
She ends her opinion by analyzing the extent to which the services provider is obliged to investigate whether its formal counterparty could be considered to have a fixed place of business because of the subsidiary. While it is clear that the Implementing Regulation obliges services providers to identify the fixed establishment to which a service is provided, again, this concept requires a single taxable person with presence in two VAT territories. Therefore, the Implementing Regulation does not cover this case. While the regular VAT rules allow Member States to impose certain due diligence obligations to detect tax abuses, it is not acceptable to oblige taxable persons to undergo complex and far-reaching checks that result in transferring investigative tasks to private parties.
Also, the reasonable degree of care that can be required of taxable persons to correctly assess the place of supply of services and avoid tax abuse does not include verifying contractual relationships between counterparties and their group entities.
Some time ago, I tried to draw the attention of VAT practictioners to the fact that the Spanish tax inspection attacked in the VAT field commisionares structures using the same permanent establishment grounds they had succeeded with in direct tax cases (VAT and commissionaire structures: is winter coming?). Several tax litigation cases (including the Supreme Court’s landmark judgment of March 28, 2018, annuling a tax assessment based on the same technique of considering that a subsidiary is the fixed place of business of its foreign parent company) show that the Spanish tax inspectors found an easy interpretation tool that, in view of AG’s conclusion, is not allowed under the VAT provisions. Therefore, if the Court of Justice follows Kokott’s interpretation, and takes into account the Spanish Supreme Court case law, all these cases will fall like a house of cards.
As the German saying goes, there are still judges in Berlin or, more precisely, AG Kokott still works in Luxembourg and reminds us that having an excuse to fight tax abuse does not allow tax administrations to punish taxpayers that organize their affairs freely, when there is no risk for tax collection.