The mere possession of a subsidiary in a Member State does not imply the existence of a PE for VAT purposes. Judgment of the ECJ of May 7, 2020. Dong Yang


The European Court of Justice (ECJ) has ruled again on the scope of definition of Permanent Establishment (PE), for VAT purposes, pursuant to articles 11 and 22 of Implementing Regulation 282/2011. In this case, the question is raised by the intervention of a subsidiary and its possible consideration as actual recipient of the services rendered by a local provider in the same Member State.

Pursuant to the main proceedings, the Polish company Dong Yong entered into a contract with a Korean company, LG Display Co. Ltd. (LG Korea), by which it would provide assembly services for printed circuit boards, using materials and components owned by LG Korea. These materials were customs cleared and delivered to Dong Yong by a subsidiary of LG Korea in Poland (LG Poland), which has its own means of production and a different VAT number than LG Korea.

Dong Yong subsequently sent the circuit boards to LG Poland, which used them to produce TFT LCD modules, owned by LG Korea, under a contract with the latter, and which were finally delivered to another company, LG Display Germany GmbH.

Understanding that LG Korea was the recipient of the services, Dong Yong invoiced it without VAT, by application of the place of supply rule contained in article 44 of the VAT Directive 2006/112/EC. However, the Tax Administration considered that the subsidiary of LG Korea, that is, LG Poland, constituted a PE for VAT purposes and was the actual recipient of the assembly services, so it settled the corresponding Polish VAT to Dong Yong. Furthermore, the Administration understood that Dong Yong was obliged to examine who was the beneficial owner of the services it provided and to be aware about LG Korea’s contractual links with LG Poland.

Having filed an appeal before the corresponding Court, the latter considers that there is some factual difference with respect to the ECJ’s jurisprudence on the matter, since the economic headquarters of LG Korea is outside the EU, and it cannot freely develop an economic activity in Poland. Therefore, it asks the ECJ whether the existence of a PE can be deduced from the mere existence of a subsidiary and whether the service provider should take into account the contractual relationships between the parent and the subsidiary.

However, the ECJ quickly resolves the issue by stating that the qualification of a PE cannot depend solely on the legal regime of the entity in question, so, although it is possible for a subsidiary to constitute a PE, this qualification depends on the material conditions established by the Implementing Regulation 282/2011 in its article 11, which must be examined in light of the economic and commercial reality.

On the other hand, the ECJ also concludes that in no case is the service provider obliged to examine the contractual relationships between the parent company and the subsidiary in order to decide whether it has PE or not, since, on the one hand, the criteria that the provider must follow in this sense are defined in article 22 of the Implementing Regulation and, on the other hand, the service provider does not have access, in principle, to said information.

The sentence has case number C-547/18.

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