ECJ’s resolution, of October 16th, 2014. Welmory sp Z o.o. Concept of “fixed establishment” of the recipient of a supply of services
The resolution from the Court of Justice of the EU confirms the elements necessary for the existence of a Permanent Establishment (PE) for VAT and the approach taken in this regard by the same court in the past, except that in this case it refers to the existence of a PE by the acquirer of the services, as recipient thereof.
The case concerns Welmory, which is a Cypriot entity aimed to the organization of Internet auctions through the sale of rights to make an offer in an auction (“bids”). The company did sign a contract with another Polish company to provide services related to make available an internet auction site and services related to renting servers and product presentation. Meanwhile, the Polish company supplied to the Cypriot entity advertising services, treatment and processing of data, all of them without VAT, considering these as placed in the economic headquarter of the recipient, i.e. at Cyprus.
However, the tax authorities considered that the Cypriot entity has used the technical and human resources of its Polish supplier, with a sufficient degree of permanence, which gave rise to the existence of a PE in Poland and, therefore, this PE was the recipient of the services and those are subject to VAT in Poland.
The Court referred to the provisions of the Implementing Regulation 282/2011, noting that it is contemplated that a permanent establishment may be recipient of a service provision and it “must be characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs”.
Firstly, the Court notes that the fact that an economy activity, as the one developed by the Cypriote company may be exercised without a human structure and effective material on the Polish territory is not determinative. In this regard, the Court recognizes that this activity needs an appropriate structure in technical and human resources, such as “appropriate computer equipment, servers and software”, so that these elements gives the ability to provide the means to develop an activity and, therefore, if having a sufficient degree of permanence, give rise to a PE. However, the national court has to determine whether this is the case and whether these elements exist in Poland.
However, secondly, the Court notes that “The fact that the economic activities of the two companies, which are linked by a cooperation agreement, form an economic whole and that their results are of benefit essentially to consumers in Poland is not material for determining whether the Cypriot company possesses a fixed establishment in Poland“. In this regard, the Court added that “the services supplied by the Polish company to the Cypriot company must be distinguished from those supplied by the Cypriot company to consumers in Poland. They are distinct supplies of services which are subject to different schemes of VAT”.
In summary, the Court concludes that the company would have a PE if it has a site with sufficient degree of permanence with technical and human resources (this must be verified by the National Court). In this sense, servers and software could be the means if they were in Poland, but the commercial agreement between the two companies is not decisive itself.
A copy of the resolution C-605/12 is attached.
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ECJ C_605_12 VAT. Welmory. Concept of PE of the recipient of a supply of services