The concept and requirements of a fixed establishment are based on case law of the European Court of Justice (ECJ). The fixed establishment is legally defined in Art. 11 of the VAT Implementing Regulation.
A fixed establishment for VAT purposes must be distinguished from a permanent establishment for income tax purposes (defined in sec. 12 of the German Fiscal Code) and from the definition of a permanent establishment under double taxation agreements (defined in Art. 5 para. 1 OECD Model Tax Convention). A fixed establishment for VAT purposes and a permanent establishment for income tax purposes are based on different criteria. A fixed establishment may also meet the requirements of a permanent establishment, but this is not necessarily the case.
The existence of a fixed establishment has particular implications for determining the place of supply of services, as well as for determining whether a taxable person is established in Germany or abroad.
When does a fixed establishment exist?
A fixed establishment requires a stable structure that, in terms of its human and technical resources, allows for the autonomous provision or receipt of services (art. 11 of the VAT Implementing Regulation).
Therefore the following conditions must be met for a fixed establishment to exist:
Sufficient degree of permanence
Human and technical resources
Autonomous provision of services (active) or receipt of services (passive)
1. Sufficient degree of permanence
A stable structure is deemed to exist if the necessary human and technical resources of the fixed establishment are available at all times to carry out essential business activities. According to the German tax authorities (cf. sec. 3a.1 para. 3 sentence 4 of the German VAT Administrative Guidelines), a stable structure exists, for example, if:
the establishment has a number of employees,
contracts can be concluded,
accounting and record-keeping take place within the establishment,
decisions are made there.
A fixed physical location is not required for a fixed establishment for VAT purposes (unlike the definition of a permanent establishment for income tax purposes).
The human and technical resources and the resulting permanence must lead to a structure that allows for autonomous provision or receipt of services.
2. Human and technical resources
A fixed establishment requires both human and technical resources, i.e. the taxable person must have its own personnel and physical assets that are owned by the taxable person. Both elements must be present to a minimum extent in order to meet the criteria of a fixed establishment (cf. ECJ, judgment of 3 June 2021 – case C-931/19 – Titanium; cf. KMLZ Newsletter 21/2021 ECJ: letting of a property in the absence of own staff does not constitute a fixed establishment).
The taxable person must be able to unrestrictedly access the human and technical resources at all times. It is sufficient if the human and technical resources are available to the taxable person as if they were their own (e.g. through long-term lease agreements, rights to issue instructions, etc.).
3. Autonomous provision (active) or receipt of services (passive)
Finally, a fixed establishment must actually provide or receive services. It is not sufficient, if the fixed establishment is merely capable of providing or receiving services.
What are the legal consequences?
1. Shift of the the place of supply of services
The involvement of a fixed establishment changes the place of supply for VAT purposes. As a general rule:
B2C transactions: The service is rendered at the place where the taxable person has established his business (cf. sec. 3a para. 1 sentence 1 of the German VAT Act, art. 45 sentence 1 of the VAT Directive)
B2B transactions: The service is rendered at the place where the customer has established his business (cf. sec. 3a para. 2 sentence 1 of the German VAT Act, art. 44 sentence 1 of the VAT Directive)
If the service is provided by a fixed establishment, the place of supply changes:
B2C transactions: The service is rendered at the place where the fixed establishment is located (cf. sec. 3a para. 1 sentence 2 of the German VAT Act, art. 45 sentence 2 of the VAT Directive)
B2B transactions: The service is rendered at the place where the fixed establishment is located (cf. sec. 3a para. 2 sentence 2 of the German VAT Act, art. 44 sentence 2 of the VAT Directive)
If a service is provided by a fixed establishment, the service must actually be attributable to the fixed establishment. According to the German tax authorities, the work required to perform the service must be carried out predominantly by the fixed establishment. It is not necessary for the transaction to be concluded by the fixed establishment (cf. sec. 3a.1 para. 2 of the German VAT Administrative Guidelines).
If the service is provided to a fixed establishment, the service must be intended exclusively or predominantly for the fixed establishment and used there. It is irrelevant whether the order or payment is made by the fixed establishment (cf. sec. 3a.2 para. 4 sentence 2, 3 of the German VAT Administrative Guidelines, art. 21 of the VAT Implementing Regulation). In practice, it is often difficult for the supplier to determine whether a service is intended for the recipient’s headquarters or a fixed establishment. The supplier must assess this based on the nature and use of the service. If this is not possible, other criteria must be considered to determine whether the service is actually intended for a fixed establishment of the recipient, particularly the contractual arrangements, the VAT -ID-number provided, and the payment method (cf. sec. 3a.2 para. 4 sentence 4 of the German VAT Administrative Guidelines, art. 22 para. 1 of the VAT Implementing Regulation). If the fixed establishment cannot be identified based on these criteria, the supplier may assume that the service is provided at the place where the recipient has established his business (cf. sec. 3a.2 para. 4 sentence 5 of the German VAT Administrative Guidelines, art. 22 para. 1 of the VAT Implementing Regulation).
2. Establishment
Through a fixed establishment, the taxable person is generally deemed to be established in the country where the fixed establishment is located. However, this only applies to the extent that the fixed establishment with its human and technical resources is involved in the supply of services (or the receipt of services) and not merely acting in a supporting role.
To be established in the country of the fixed establishment has implications for several VAT-related mechanisms, including the reverse-charge mechanism (shift of VAT liability), the input VAT deduction, one-stop shop scheme and the application of the simplification rule for consignment sto
2.1 Shift of VAT liability (reverse charge)
Example:
A is a taxable person established in Austria (headquarters). A has a fixed establishment in Germany.
Variant 1: A uses the human and technical resources of the fixed establishment to provide the service to B.
Solution:
A is deemed to be established in Germany as the fixed establishment is used for providing the service.
The reverse-charge mechanism does not apply (cf. sec. 13b para. 1, para. 7 sentence 3 of the German VAT Act, art. 53 para. 2 of the VAT Implementing Regulation), i.e. invoicing with German VAT
Variant 2: A does not use the human and technical resources of the fixed establishment to provide the service to B.
Solution:
A is not deemed to be established in Germany.
The reverse-charge mechanism applies (cf. sec. 13b para. 1, para. 7 sentence 3 of the German VAT Act, art. 192a of the VAT Directive)
Variant 3: The fixed establishment is not involved in providing the service, but issues the invoice on behalf of A and collets the payment.
Solution:
The activities of the fixed establishment are merely supportive and insufficient to constitute an establishment (cf. art. 53 para. 2 of the VAT Implementing Regulation).
A is not deemed to be established in Germany (cf. sec. 13b.11 para. 1 sentence 5 of the German VAT Administrative Guidelines, art. 53 para. 2 of the VAT Implementing Regulation).
The reverse-charge mechanism applies (cf. sec. 13b para. 1, para. 7 sentence 3 of the German VAT Act)
Variant 4: The fixed establishment is not involved in providing the service. A indicates the German VAT-ID-number of the fixed establishment on the invoice to B.
Solution:
By indicating the German VAT-ID-number of the fixed establishment, it is presumed that the fixed establishment is involved in the service provision (cf. sec. 13b.11 para. 1 sentence 6 of the German VAT Administrative Guidelines, art. 53 para. 2 of the VAT Implementing Regulation).
This presumption can be rebutted.
A is deemed to be established in Germany unless he can prove that the fixed establishment was not used for providing the service.
2.2 Input VAT deduction
If there is a fixed establishment that constitutes an establishment, the input VAT deduction must be claimed by the taxable person through the regular VAT return procedure. The input VAT refund procedure does not apply to the taxable person's headquarters abroad.
2.3 OSS procedure
The existence of a fixed establishment may limit the application of the OSS scheme. If a taxable person provides a service to a non-taxable person in an EU Member State in which the taxable person has a fixed establishment, this service cannot be reported via the OSS scheme (cf. sec. 18j.1 para. 1 sentence 4 of the German VAT Administrative Guidelines).
2.4 No application of the consignment stock simplification rule
The simplification rule for consignment stocks under sec. 6b of the German VAT Act does not apply if the taxable person has a fixed establishment in the EU Member State of destination that establishes a fixed establishment (cf. sec. 6b.1. para. 2 of the German VAT Administrative Guidelines).
This issue has also been addressed by the VAT Committee in connection with Article 17a of the VAT Directive (§ 6b of the German VAT Act), particularly regarding when a warehouse qualifies as a fixed establishment (cf. Working Paper No. 968 dated 15 May 2019).
Are there special case scenarios?
Subsidiary as a fixed establishment
According to the case law of the ECJ, a subsidiary may constitute a fixed establishment of its parent company (cf. ECJ, judgment of
14 November 2019 – C-547/18 – Dong Yang; cf. KMLZ Newsletter 17/2020 ECJ: EU subsidiary as fixed establishment of its foreign parent company). This requires:
Fulfilment of the substantive requirements of Art. 11 of the VAT Implementing Regulation and
consideration of the economic and business reality
Contract manufacturing
The ECJ ruled, that an independent contractor (contract manufacturer) does not constitute a fixed establishment of the principal, even if he is contractually obliged to use its facilities and personnel exclusively for services to the taxable person (cf. ECJ, judgement of 29 June 2023 – C-232/22 – Cabot Plastics Belgium, cf. KMLZ Newsletter 30/2023 Fixed establishment: New ECJ decision brings clarity for tolling cases). The ECJ reasoned that the human and technical resources used to establish a fixed establishment cannot be the same as those used to provide (or receive) the service (cf. ECJ, judgement of 07.04.2022 – C-333/20 – Berlin Chemie A. Menarini SRL, cf. KMLZ Newsletter 16/2022 ECJ: Fixed establishment through attribution of third-party human and technical resources; ECJ, judgement of 13.06.2024 – C-533/22 – Adient, cf. KMLZ Newsletter 30/2024 ECJ: group company as a fixed establishment of another group company?).
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