In brief
This article outlines the main features of the concept of intervention of the VAT fixed establishment (FE) at EU level with a specific focus on Italy and Czech Republic approach and latest domestic developments. Moreover, the criticalities deriving from the lack of a uniform approach at the Member State level are also considered.
The intervention of a FE in another Member State may have implications for businesses in relation to the place of supply of services and the liability to pay VAT in a Member State. There is, however, no clear guidance across the EU, as to when an FE is deemed to have "intervened" in a transaction.
The 10 December 2020 Conversant/Valueclick ruling in France highlighted the VAT uncertainties businesses face when they operate a branch in another Member State.
In this client alert we will particularly highlight the domestic rules of Italy & the Czech Republic. While the focus of the alert is on these jurisdictions, the key take-away applies to all Member States: uniform and harmonized guidance is missing.
1. EU framework on intervention of the FE
Directive 2008/8 firstly introduced the concept of intervention of the FE.
Prior to the issuance of this Directive, based on the rule applicable at that time, Member States generally took the view that supplies of goods or services carried out by an entity with a FE for VAT purposes in the purchaser / recipient’s Member State had to be considered as rendered by the FE regardless of its involvement in the supply. This was the so-called “force of attraction” of the FE rule. As a result, these transactions were never subject to the reverse charge mechanism by the customer in the Member State concerned.
Directive 2008/8 introduced a new concept aimed at mitigating the principle of the force of attraction and establishing a threshold under which the FE should not be considered involved in a transaction, i.e. the “intervention” of the FE concept.
More precisely, “intervention” of a FE in a VAT transaction affects the VAT treatment of the transaction itself in two ways:
- Identification of the place of supply (services only). Pursuant to Article 11 of the VAT Implementing Regulation (Regulation 282/2011) and Article 44 of the VAT Directive (Directive 112/2006), for the purpose of place-of-supply rules applicable to services, service providers / recipients are deemed to be established in the Member State where they have a FE, unless the FE has not intervened in the supply. When place of supply rules for services are linked to the establishment of the service provider / recipient, the intervention of the FE obviously affects the localization of the transaction from a VAT perspective. The above rule, as acknowledged by the VAT Committee in the Working Paper n. 857/2015, exclusively applies in case of services; given for a supply of goods, the place of supply of goods is identified with reference to the geographical location of the goods themselves.
- Qualification of the FE as the party responsible to issue / receive the invoice. The FE is the party liable to charge/pay VAT and to issue / receive the invoices in the Member State of establishment only to the extent it intervenes in the relevant supply. If the FE does not intervene and the purchaser is a taxable person, the latter will be required to pay VAT under the reverse charge mechanism, where applicable. In this respect, intervention of the FE affects both supply of goods and supply of services.
However, the legislation does not make completely clear the exact perimeter for when a FE intervenes. Indeed, the concept of “intervention”, as outlined in Art. 53(2) of the Implementing Regulation, has a broad meaning, which was inspired by the conclusions of the 86th meeting of VAT Committee, held on 18 and 19 March 2009. According to Art. 53(2), intervention of the FE exists if the FE uses its technical and human resources for transactions inherent in the fulfilment of the taxable supply of goods or services made within that Member State, before or during this fulfilment. Administrative support functions, such as accounting, invoicing, and debt collection do not qualify as intervention by the FE. Where the FE’s VAT identification number is mentioned on the invoice, the FE is presumed to have intervened, unless there is evidence to the contrary.
As one may appreciate, the mitigation of the “force of attraction” of the FE depends on how these borders of the concept of “intervention” are applied. The absence of a legal definition of “intervention” enables Member States to take different views: a minimal or even a potential involvement of the FE in making a supply of services might be enough to deem the FE intervening in the supply.
In this respect, the EU VAT Committee provided some guidance in a couple of working papers dedicated to the role of the FE in the VAT framework (WP nos. 791/2014 and 857/2015). According to the VAT Committee, a FE intervenes in the transaction if the human and technical resources of the FE are actually used in order to provide (before or during the execution) support to complete the transaction
A FE has actually intervened in a supply of services or goods provided by the taxable person if ‘the technical and human resources of that fixed establishment are used’ not for any purpose but ‘for transactions inherent in the fulfilment of the taxable supply’ (Article 53(2) of the VAT Implementing Regulation). Administrative support tasks are not sufficient for considering the fixed establishment as intervening in the supply. In light of this, the VAT Committee concludes that intervention of a FE (the existence of which has first been established against the criteria of Article 11 of the VAT Implementing Regulation) in a concrete supply should be assessed on a case-by-case basis against the conditions listed in Article 53 of the VAT Implementing Regulation. The VAT Committee also clarified that a fixed establishment cannot be seen, in any case, as intervening in a supply by default.
2. The Italian approach
Italian VAT legislation does not provide for any specific domestic rule governing the concept of intervention of the branch. As a result, at local level, reference shall be made to the guidelines of the Tax Administration.
The first position of the Italian tax administration on the concept of “intervention” preceded the above-mentioned working papers of the VAT Committee and delineated a very wide concept of intervention of the FE.
Indeed, in Circular Letter 37/E of 2011, it was clarified that even minimal intervention by the FE is sufficient to consider it to be taking part in the transaction (“the FE is involved in the performance of the service, when in any way the supplier uses the technical or human resources of the FE in Italy for the execution of the sale or provision of the services”).
After the issuance of the working papers by the VAT Committee - which was triggered by a question by the same Italian tax administration - the Italian tax administration seemed to partially narrow the approach taken in said Circular Letter. With Ruling no. 954-643/2015, the Italian tax administration stated that the FE should be deemed as intervening when it performs “an essential part” of the transaction. According to the Italian tax administration, involvement should be assessed on a case-by-case basis, depending on whether technical and human resources thereof are actually deployed in “material activities inherent to the taxable transaction”. Based on this interpretation, it would seem that a “qualified” involvement of the FE is required to have intervention in the transaction.
Moreover, according to the Italian tax administration, in case of intervention, the FE is deemed as the supplier of the service/goods not being its role limited to that of billing entity.
The Italian tax administration added another piece to the puzzle of the notion of intervention with the recent Ruling no. 52/2021. Such ruling confirmed that the principles stated in Art. 53(2) of the VAT Implementing Regulation apply also in case of the FE is the recipient of the services, i.e. a FE that is involved only in inbound VAT transactions. In that respect, the Italian tax administration stated that intervention of the FE shall be assessed based on whether such FE was involved with its technical and human resources in the inbound transaction and whether such FE was the actual recipient of the goods/services purchased. The case concerned a foreign company (with a FE in Italy) that entered into a contract with a foreign supplier (without a FE in Italy) to purchase line-fill gas for the functioning of the Italian portion of a gas pipeline. Said agreement was entered into by the head office, without the involvement of the FE. However, according to the tax administration, though not involved in the conclusion of the agreement, the FE was involved “during" the execution of the inbound transaction, i.e. while the supply was in progress, especially taking into account the continuous nature of the supply in the case at hand. More in detail, the tax administration gave relevance to the active role performed by the FE in the "continuous" supply of gas, including performance of activities such as asset management functions, dispatching and control of the Italian section of the pipeline, procurement, as well as direct management of the supply flow (also, the FE was the actual recipient and user of the gas, which factor triggers territoriality in Italy). Moreover, the Italian tax administration stressed that if the invoice is issued vis-à-vis the FE, the latter's intervention is presumed, unless evidence to the contrary is given.
3. The Czech Republic approach
As in a number of other EU Member States, there is no guidance clarifying the application of intervention rules in the Czech Republic. There is also no case law so far.
The only guidance is given by Art. 192a of the VAT Directive together with the Art. 53 of the VAT Implementation Regulation. Therefore, the recommended approach must be interpreted solely from these provisions.
As a first step, taxpayers should test whether the FE has a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to make the supply. In other words, the FE should be considered as being able to provide services at the first place, before analyzing any intervention.
If the FE is able to provide services, as a second step, taxpayers should analyze whether this FE was involved in provision of services and the extent of the involvement, by applying the Art. 53 of the VAT Implementation Regulation. i.e. The taxpayer should analyze whether the resources of the FE were used for transactions inherent in the fulfilment of particular taxable supply. If the answer is positive, the FE may be considered as intervening in provision of the taxable supply.
If, however, the resources were used, only for administrative support tasks such as accounting, invoicing and collection of debt-claims, then the FE will not be considered as intervening in provision of services.
Finally, if, taxpayers consider that the involvement of the FE was not sufficient, and it was more of a supportive nature, the invoice for the services should not be issued under the VAT identification number attributed to the FE in the Czech Republic.
In practice, the wording of the Art. 53 of the VAT Implementation Regulation does not provide sufficient legal certainty to taxpayers in many situations. In those situations, taxpayers must rely on their analysis of whether the intervention was of an administrative nature or not. Currently it is difficult to predict whether the interpretation of the "administrative nature" of involvement of a FE by the tax authorities would be broad or narrow. We recommend where there could be doubt businesses keep evidence of an internal (or external) analysis for possible future tax audits in order to be able to explain the approach taken and prove that appropriate care was given to this issue.
Conclusion
The notion of intervention of a FE in a transaction, introduced to mitigate the principle of “force of attraction”, does not seem to be anchored to precise parameters neither at EU level nor at Member States' domestic legislation level.
Indeed, the VAT Committee has over time provided little clarification on the perimeter of the intervention, keeping it apparently quite broad.
The same approach seems to have been taken by tax administrations at Member States' level. Indeed, the current position in Italy and Czech Republic, as outlined above, appears to be in line with that of the majority of the other Member States, where the general guidelines provided by the VAT Committee apply but no domestic provisions to further clarify the concept have been issued.
The absence of a specific legal definition of “intervention” leaves room for Member States to take different views on the same transaction, also allowing that a minimal or even a potential involvement of the FE triggers intervention in the supply.
Such potential different takes on the notion of intervention by Member States may have significant and burdensome effects on businesses operating through branches: identifying which party has made, or intervened in, the supply, and who is liable to tax might not be an easy task (and “free of charge”).
This could lead to two Member States claiming that the entity established therein is the supplier/purchaser of the transaction with significant consequences in terms of invoicing and VAT payment.
In light of the above, uniform and clear guidance from the Court of Justice of the EU and/or at least the VAT Committee on this aspect is desirable.
