On 29 June 2022, the Court of Justice of the European Union ("the ECJ") rendered its judgment in the 'Cabot Plastics' case (C-232/22) completing its string of subsequent decisions on fixed establishments for VAT purposes.
The ECJ rules that a toll manufacturer who exclusively uses its resources and staff to produce goods for the principal who ultimately sells these goods, does not constitute a fixed establishment of the principal in the Member State where the toll manufacturer is established.
This judgment further clarifies the notion of fixed establishment for international company groups where subsidiaries work on a (near) exclusive basis for another member of the group.
Situation
The case presented to the ECJ involved two entities of the same
group: Cabot Switzerland GmbH ("the Principal") and Cabot
Plastics Belgium ("Cabot Belgium"). Cabot Belgium
provided toll manufacturing services to the Principal, as well as
various logistic support services. Cabot Belgium used its own
resources and staff to transform raw materials belonging to the
Principal into finished plastic products. The logistic support
services were also carried out exclusively for the Principal. Cabot
Belgium invoiced its services to the Swiss Principal without
Belgian VAT.
The Belgian VAT authorities deemed that the Principal had a fixed
establishment in Belgium through Cabot Belgium. Their reasoning was
that the Principal can exclusively dispose of the staff and
resources of Cabot Belgium under the toll manufacturing agreement.
This would give the Principal sufficiently permanent presence in
Belgium forming a fixed establishment. For rendering its services
to the Belgian fixed establishment of the Principal, Cabot Plastics
was ordered to remit Belgian VAT to the Belgian VAT authorities.
The question on whether a fixed establishment exists was then
brought before the ECJ.
Judgment
The ECJ rules that the Principal does not have a fixed establishment in Belgium through Cabot Belgium.
Firstly, the ECJ bases its decision on the fact that the exclusive toll manufacturing agreement does not allow the Principal to use Cabot Belgium's human and technical resources like they belong to the Principal. Cabot Belgium remains responsible for its own resources and carries out the toll manufacturing services at its own risk. The objective of the exclusive toll manufacturing agreement was not to allow the Principal to use Cabot Belgium's resources like they belonged to the Principal.
Secondly, a distinction should be made between the services provided by Cabot Belgium to the Principal and the sales of the manufactured goods by the Principal. To establish the place where the toll manufacturing services are received (and where the Principal could have a fixed establishment), it should be assessed where the Principal uses the resources to receive these services rather than where the Principal uses the resources for its distinct sales activity. It is impossible that the resources of Cabot Belgium are used to provide toll manufacturing services as a service supplier and at the same time to receive those same services (as a fixed establishment of the Principal).
Lastly, the fact that Cabot Belgium provides logistic support services to the Principal that facilitate the sales activity of the latter does not affect the question whether the Principal has a fixed establishment.
Our views
The ECJ takes a clear position that subsidiaries should not constitute a fixed establishment of another group company acting as principal. Even in the situation where the subsidiary is exclusively providing tolling services to that principal, the subsidiary is acting for its own risk and account and remains responsible for the staff and resources it uses. The principal cannot dispose of the staff and resources of the subsidiary as its own. By not recognizing a fixed establishment for a typical toll manufacturer, the ECJ gives much welcomed certainty for multinationals operating in such and similar structures.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
