On 25 October 2012, the Court of Justice of the European Union (CJEU) delivered its judgment in the joined cases of Daimler AG (C-318/11) and Widex A/S (C-319/11) v Skatteverket. The cases concerned the issue of what should be regarded as a "fixed establishment" for VAT purposes. In both cases, the Swedish Tax Agency (Sw: Skatteverket) claimed that the taxpayers had "fixed establishments" in Sweden which excluded the right to refund of VAT paid in Sweden under the provisions of the 8th Directive and Directive 2008/9.

Daimler AG, the German car manufacturer, has a Swedish wholly owned subsidiary which owns and operates testing facilities in Arvidsjaur in the northern part of Sweden. It does not carry out any taxable transactions in Sweden but only conducts winter testing of cars, bringing the necessary testing equipment and personnel to the testing facilities in order to carry out the testing. Daimler AG incurred input VAT on costs related to the testing activities. Under the 8th Directive and Directive 2008/9, Daimler AG applied to the Swedish Tax Agency for a refund of the input VAT paid on its purchases. The Tax Agency, however, decided not to grant a refund on the ground that Daimler AG had a fixed establishment in Sweden.

Daimler AG appealed against the Agency's decision to the Administrative Court in Falun which referred the case to the CJEU for a preliminary ruling.

The Swedish Tax Agency claimed, given the purpose, structure and system of the 8th Directive and Directive 2008/9 that the term "fixed establishment from which business transactions were effected" shall be construed as excluding a right to refund if the applicant has a connection with the repaying member state in the form of a "fixed establishment" in the more substantial sense.

Further, the Swedish Tax Agency claimed that the rules in question do not require taxable activities to have actually been conducted in order for a "fixed establishment" to be deemed to exist. Accordingly, the Agency claimed that it follows from Community law and CJEU case-law that a "fixed establishment" is an establishment having sufficient permanence and a suitable structure with regard to human and technical resources. This establishment must be considered sufficiently independent for goods or services to be consigned from it. It is not necessary for goods or services to be actually supplied from the "fixed establishment." The decisive criterion according to the Swedish Tax Agency is the existence of a potential for doing so.

In another case, Widex A/S, a Danish company with a research division based in Sweden, also incurred VAT on costs associated with the research activities but it had, as Daimler AG, no taxable activities in Sweden. Again, the Swedish Tax Agency considered a fixed establishment was at hand and refused to refund the VAT incurred.

With regard to the first question in each of the two cases - whether a taxable person established in one member state carrying out only testing activities or research work without conducting taxable transactions in another member state, can be regarded as having a "fixed establishment from which business transactions are effected" within the meaning of the 8th Directive and Directive 2008/9 - the CJEU stated that such a criterion includes two cumulative conditions requiring, firstly, the existence of a "fixed establishment" and, secondly, that transactions be carried out from that establishment.

Thus, according to the CJEU, in order to refuse a right to refund, taxable transactions must actually be carried out by the "fixed establishment" in the state where the application for refund is made and a mere ability to carry out such transactions does not suffice.

Unfortunately, the CJEU did not find it necessary to examine whether the undertakings in question do actually each have a "fixed establishment" within the meaning of the provisions to be interpreted, since the two conditions forming the criterion of a "fixed establishment from which business transactions are effected" are cumulative.

In both cases, the CJEU thus confirmed that the actual carrying out of taxable transactions in the member state of refund is a necessary requirement for there to be an exclusion of a right to refund, whether or not the applicant taxable person has a fixed establishment in that State.

Another question in the Daimler AG case was whether the interpretation of the concept of a "fixed establishment from which business transactions are effected" would be affected by the fact that the taxable person has, in the member state where it has applied for refund, a wholly owned subsidiary the purpose of which is almost exclusively to supply the person with various services related to the testing activities.

The Swedish Tax Agency argued that the CJEU in the DFDS Case (C-260/95) has held that a subsidiary which has technical and human resources, and acts as a mere auxiliary of the parent company constitutes a "fixed establishment" of that company in the member state where the subsidiary is located.

Here, the CJEU noted that the wholly owned subsidiary of Daimler AG is a taxable legal person on its own account and that the purchases at issue were not made by that subsidiary. Furthermore, the CJEU pointed out that, in the case which gave rise to the judgment in DFDS case, the independence of the subsidiary was disregarded in favour of the commercial reality only in order to ascertain which of the parent company and the subsidiary had actually carried out the taxable transactions in dispute, subsequently, which was the member state of taxation of those transactions. The CJEU thus ruled that the interpretation of the case at hand was not affected by the existence of a wholly owned subsidiary.

As a final point, this case clearly demonstrates the extent to which a member state is willing to go in order to avoid paying a VAT refund. As the legal representative of Daimler AG in this case, I can also state that this is not an isolated case but instead confirms a new unsettling trend where the tax authorities are trying to avoid payments of legitimate VAT refunds without real legal support