As the global economy becomes increasingly integrated, borders cease to be barriers for trade and services transactions. In this new reality, grasping key tax concepts such as “fixed establishment” becomes exceptionally crucial.
The concept of a fixed place of business in the context of the VAT Act
In the Polish legal system, the notion of a fixed establishment lacks a precise definition within the Act of March 11, 2004, on Goods and Services Tax (VAT Act). However, Article 28b of this act contains pivotal information for determining the place of supply of services to taxpayers. According to it, if services are provided to a taxpayer, the place of supply is the location of that taxpayer’s economic activity. In cases where services are provided to a fixed establishment of the taxpayer located in a place other than the taxpayer’s economic activity location, this fixed establishment is precisely where the services are deemed to be supplied.
The comprehension of the concept of a fixed establishment for business activities has been shaped through judgments rendered by the Court of Justice of the European Union, further referred to as CJEU (e.g. Case C-333/20 Berlin Chemie A. Menarini SRL; Case C-547/18, Dong Yang Electronics, and Case C-931/19, Titanium Ltd). Subsequently, this concept found its reflection in Council Implementing Regulation (EU) No 282/2011 of 15 March 2011, which comprises practical measures for Directive 2006/112/EC, governing the general system of value-added tax.
The characteristics that a fixed establishment (FE) for business activities should possess
A fixed establishment for business activities is defined by specific features and criteria that determine whether a given location can be recognized as a fixed establishment.
As mentioned earlier, the EU regulation that governs the concept and criteria of a fixed establishment for business activities (“fixed establishment” in VAT terms) is Council Implementing Regulation (EU) No 282/2011 of 15 March 2011. Article 11 provides essential guidelines concerning the definition of a fixed establishment for business activities.
According to Article 11 of this regulation, a ” fixed establishment” refers to any location that differs from the taxpayer’s business headquarters and meets three key criteria:
- Sufficient Permanence: A fixed establishment must be a place with a consistent presence and business activity by the entrepreneur for a duration substantial enough to prevent its classification as temporary. This implies that it cannot be a one-time or occasional presence; rather, it should entail continuous and enduring operations.
- Appropriate Structure: The fixed establishment must have an adequate structure concerning both personnel and technical aspects. This entails possessing staff as well as technical infrastructure, including necessary equipment and facilities (machinery, warehouses) enabling the execution of business activities within this area.
- Capability to Receive or Render Services: The location must be capable of receiving and utilizing services provided to it or appropriately delivering services performed by the establishment itself.
It should be noted that all three of these attributes must concurrently be met in order to designate a fixed establishment for the entrepreneur concerning VAT taxation perspectives.
Fixed establishment and VAT
The concept of a fixed establishment holds significant importance in the context of VAT taxation regulations. Generally, when providing services to entities registered for VAT, these services are subject to taxation in the country where the recipient of the service is based. This is done through the mechanism of reverse charge. In essence, when foreign entities provide services to Polish clients, they typically issue invoices without charging VAT. Similarly, Polish taxpayers operate in a similar manner, providing services to clients from other countries.
However, it’s important to consider that services rendered by a Polish service provider to a foreign entity with a fixed establishment in Poland, as well as services provided by a foreign entity with a fixed establishment in Poland to a Polish recipient of services, are subject to VAT taxation in Poland without the possibility of applying the reverse charge mechanism.
The existence of a fixed establishment for conducting business activities in Poland solely for the purpose of receiving services does not entail an obligation to register for VAT purposes in Poland. However, the existence of a fixed establishment conducting business activities in Poland that provides services to foreign taxpayers does result in an obligation to register for VAT purposes in Poland; nonetheless, services provided in this manner are not subject to Polish VAT (reverse charge mechanism is applied).
Furthermore, services offered by Polish service providers to foreign fixed establishments conducting business activities within the territory of Poland, unlike services provided to foreign counterparties without a fixed establishment, are subject to VAT taxation in Poland without the possibility of applying the reverse charge mechanism. In such a scenario, the Polish service provider may incur tax arrears, which must be settled along with interest for the delay.
In summary, a fixed establishment (FE) plays a pivotal role in international VAT taxation, influencing the determination of the place of taxation for services. Council Implementing Regulation (EU) No 282/2011 and the case law of the Court of Justice of the European Union clarify that an FE is a location where an economic entity conducts a continuous and fixed activity, exercising control over its personnel and technical infrastructure.
Regarding services, they are generally subject to taxation in the country where the recipient of the service is situated, utilizing the reverse charge mechanism. Nevertheless, there are exceptional situations, such as services provided to a fixed establishment within the territory of Poland, where VAT taxation applies to Poland. It is crucial to avoid errors in service identification and to properly register for VAT in order to prevent potential tax arrears and interest.
Taxpayers engaged in international markets should recognize the significance of the fixed establishment concept and its associated tax implications. When in doubt, seeking the assistance of an experienced tax or legal advisor is advisable to ensure compliance with prevailing regulations and to mitigate the risk of improper taxation. Understanding and appropriately addressing the requirements related to fixed establishments are key to the effective and lawful conduct of business activities within the context of international VAT taxation.
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The amavat® Team
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