On 16 October 2014, the Court of Justice of the European Union (hereinafter "CJEU") ruled in Welmory sp. z o.o. v Dyrektor Izby Skarbowej w Gdańsku (Case C-605/12).
This case concerns the concept of "fixed establishment" of the recipient of a supply of services and the place in which services are deemed to be supplied to taxable persons.
Welmory sp. z o.o. (hereinafter "Welmory PL"), a company established in Poland, had entered into a cooperation agreement on 2 April 2009 with a Cypriot company established in Nicosia, Welmory Limited (hereinafter "Welmory CY").
Under this agreement the Cypriot company was to provide a Polish-language auction site. On that website, Welmory PL was to offer and sell products by auction for its own account, but customers could only purchase these products by auction if they had previously acquired rights from the Cypriot company to submit a bid.
Under this scheme the business model lead to two different types of turnover for Welmory PL:
- Welmory PL collected the purchase price obtained in the online auctions;
- Welmory PL received an income from the sales of the "bids" by Welmory CY.
Nevertheless, for the period between January and April 2010, Welmory PL issued four invoices to Welmory CY for the service of selling the product and associated services, such as provision of information, servicing, data processing and advertising. On these invoices, Welmory PL did not pay Polish VAT stating that the recipient of the services, namely the Cypriot company, is liable for the tax at its place of business in Cyprus.
However, the Polish tax authorities claimed that Welmory’s services should be taxed in Poland under the Article 28b(2) of the Law on VAT, because the Cypriot company maintained a fixed establishment in Poland to which the services had been provided.
The dispute was brought before the Regional Administrative Court of Gdańsk (Wojewódzki Sąd Administracyjny w Gdańsku) and the Supreme Administrative Court of Poland (Naczelny Sąd Administracyjny), after which the Supreme Court posed the following question to the CJEU:
For the purposes of the taxation of services supplied by [the Polish company], which is established in Poland, to [the Cypriot company], which is established in another Member State of the European Union, in circumstances where [the Cypriot company] carries out its economic activity by making use of [the Polish company’s] infrastructure, is the fixed establishment within the meaning of Article 44 of [the VAT Directive] situated in the place in which [the Polish company] is established?
In summary, the Polish Court seeks to establish in what circumstances a first taxable person who has established his business in one Member State, and receives services supplied by a second taxable person established in another Member State, must be regarded as having a ‘fixed establishment’ within the meaning of Article 44 of the VAT Directive in that other Member State, for the purpose of determining the place of taxation of those services.
The CJEU ruled that a first taxable person who has established his business in one Member State, and receives services supplied by a second taxable person established in another Member State, must be regarded as having a ‘fixed establishment’ within the meaning of Article 44 of the VAT Directive in that other Member State, for the purpose of determining the place of taxation of those services, if that establishment is characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive the services supplied to it and use them for its business, which is for the referring Court to ascertain.
Under the current circumstances, the Cypriot company must be regarded as having a "fixed establishment" in Poland, if this company is a structure fulfilling the following three cumulative conditions:
- a sufficient degree of permanence;
- suitable in terms of both human;
- and technical resources to enable the company to receive, in Poland, the services supplied to it by the Polish company, and to use them for its business, namely the running of the electronic auction system in question and the sale and issue of “bids”.
In this particular situation, the national Court must verify such criteria in order to know if Welmory CY has a "fixed establishment" in Poland.
Sources: The Judgment of the Court (Third Chamber) of 16 October 2014 and the Opinion of Advocate General Kokott of 15 May 2014.
Click here for the Judgment.
Click here for the Opinion.