The Preferred Treatment of the Fixed Establishment in the European VAT

Abstract: The concept of the FE is relevant in the EU VAT from the two main perspectives as regards the cross-border supplies of services: entitlement of the MS to tax the supply and distribution of VAT accounting obligations between the supplier and the customer. This influences VAT burden and cash flows of both the parties to the supply and the state in which the supply is subject to VAT. The concept is, however, far from being clear as definitions provided in the legislation are rather vague and explanations provided by the CoJ are very casuistic and do not represent the rules of the general nature. This creates a field for manipulations for both the taxpayers and the tax administrators. Respectively, the purpose of the thesis is twofold: first, to find the preferred treatment of the FE in the EU VAT stemming from the interpretation of the current legislative provisions and the ECJ’s practice, and, second, to suggest the mechanisms for mitigation of the negative effects of taxable persons’ manipulations made by channelling acquisitions through the foreign establishments. Following the Introduction, the second section of the thesis provides a background for the further discussion as it contains the analysis of the link between the principle of taxation at the place of the actual consumption and the secondary reference to the FE in the general place of supply rules for services. In the third section of the thesis, creation of the active FE and attribution of supplies thereto is discussed. It is concluded that the active FE can only exist where the necessary human and/or technical resources are present in the foreign jurisdiction for a period longer than the set threshold and they are actually used in performing the core functions inherent in particular supplies. In the fourth section, the impossibility of the independent existence of the passive FE is discussed. In addition, it is described how the acquisitions of services have to be attributed to the customer’s FE and how the taxable persons can manipulate the place of supply and VAT accounting obligations using the foreign FEs. Furthermore, it is suggested that attribution rules should be minimised and the internal supply rule and/or cross-border VAT grouping should be used to minimise the negative effects of channelling of the acquisitions through the foreign establishments.