In Titanium (C-931/19), the taxpayer was based in Jersey and owned two commercial properties in Austria which it leased to Austrian businesses. The lettings were the taxpayer’s only activities in Austria and it appointed an Austrian management company to act as an agent to invoice rental payments, maintain business records and prepare VAT returns. The agent carried out its work at premises which did not belong to the taxpayer. The taxpayer retained the power to grant and end leases, to make investments, to organise repairs and to organise its financing.
Under Austrian VAT law, the lease was a supply subject to VAT and the person liable to account for the VAT was the tenant where the landlord had no fixed establishment in Austria. The Austrian tax authority argued however that the VAT should be accounted for by the taxpayer as landlord by virtue of its having a fixed establishment in Austria. The Court of Justice was asked by the Austrian referring court whether the concept of a fixed establishment always requires the existence of human and technical resources or whether in the specific case of a passive letting, the property could itself be regarded as a fixed establishment.
In a short judgment, the Court said that settled-case law made it clear that the concept of fixed establishment implied a minimum degree of stability derived from the permanent presence of the human and technical resources required to provide the relevant services on an independent basis. The Court confirmed that a structure without its own staff could not constitute a fixed establishment. As the taxpayer did not have any staff of its own in Austria and the property was managed by an independent agent, the taxpayer could not be said to have a fixed establishment in Austria.
DLA Piper comment: The Court ruling confirmed – in accordance with the foregoing case law – the importance of having own local staff when assessing whether a taxable person possesses a fixed establishment (see also, Lease Plan C-390/96 and Aro Lease, C-190/95), also in the light of the definition of “fixed establishment” provided by Article 11 of Council Implementing Regulation (EU) No 282/2011, considered applicable by the Court even if the present case refers to events which took place before July 2011.
Today, waiting for the wide international agreement on the so called OECD Pillar 1 (which will determine a the new nexus other than the one based on the residence), physical presence is the key element that differentiates the concepts of (i) “fixed establishment” for VAT and “permanent establishment” relevant from an income tax perspective. However, in many jurisdictions, the passive management of real estate property, held directly from abroad, does not trigger the existence also of a “permanent establishment” from an income tax perspective.
In BE, DT (C-182/20), BE, a company liable for VAT, had been declared insolvent and the Romanian tax authority took the view that from that time it had thereby ceased to carry out an economic activity, since under the insolvency procedure BE was required to sell its assets to repay debts; according to the Romanian tax authority, the transactions carried out, after BE’s insolvency declaration, in such a context had no economic purpose regardless of whether or not these sales were subject to VAT. The tax authority sought to require the BE to repay input tax recovered on transactions before the declaration of insolvency and refused BE the right to recover input tax on capital goods which it continued to own at the time of the insolvency. The tax authority nevertheless required the taxpayer to continue to be registered for VAT during the winding-up operations and the sales of its assets realised during the insolvency process were subject to VAT.
The Court however pointed out that the taxpayer’s activity must be considered without regard to its purpose or results. The fact that the insolvency proceedings changed the purposes of a taxable person’s transactions in the sense that those purposes no longer included the long-term operation of its business and related instead to its liquidation for the purpose of discharging its debts could not, said the Court, in itself, affect the economic nature of the transactions. Fiscal neutrality also required two transactions which are identical or similar from the point of view of the customer and therefore in competition with one another, to be treated in the same way.
The Court therefore held that the VAT Directive precluded the Romanian rule or practice under which the initiation of insolvency automatically placed the insolvent taxpayer under an obligation to repay input tax which it had already recovered in respect of transactions which occurred before the declaration of insolvency.
DLA Piper comment: The ECJ ruling confirmed that the activity carried on during the insolvency proceeding is of an economic nature and, therefore, the output taxable transactions continue to allow the right to recover input VAT. Thus, the insolvency practitioner – appointed at the beginning of the insolvency proceeding – is still required to issue and register invoices, periodically pay VAT and submit the annual VAT return, even in cases where the insolvency procedure leads to the final liquidation of the assets to repay taxpayer’s debt. Thus, in accordance with the principle of fiscal neutrality, to the extent the taxpayer continues to be registered as a taxable entity and the output transactions continue to be subject to VAT, no VAT recapture is allowed under articles 184-186 of the EU VAT Directive.