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A fixed establishment (FE) for VAT purposes is an issue that has captured the attention of tax authorities and judicial practitioners over the years, including the Court of Justice of the European Union (CJEU) in its key judgments. With the CJEU case law, the stance of the Polish tax authorities and some national courts has shifted in favour of taxpayers.
It can be said that the line of judicial practice proposed by the CJEU, which says that a fixed establishment must meet specific criteria if VAT is to be charged on the operations conducted there, has prevailed for years. While the criteria themselves haven't changed, taxable persons still find it difficult to assess what circumstances justify the conclusion that these criteria are met. In this context, it's worth noting another important judgment, namely the CJEU judgment of June 29, 2023 issued in C-232/22.
Polish tax authorities’ prevailing practice in respect of determining the presence of a fixed establishment – the evolution prompted by the CJEU
What do EU and local Polish laws say? One of the things that Article 44 of the VAT Directive states is that if a taxable person provides services to their fixed establishment located in a place other than the place where they are established, the place of supply of those services is the place where that fixed establishment is located. In the absence of such a place of establishment or a fixed establishment, the place of supply of the services is the place where the taxable person who receives such services has their permanent residence or habitually resides.
As regards EU law, under Article 11 of Implementing Regulation (EU) No 282/2011 for the application of Article 44 of the VAT Directive, a fixed establishment means any place other than the place of establishment of a business, which is characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs.
Polish VAT law does not define a fixed establishment, it merely states that the place of supply of services to a taxable person is where the taxable person that is the service recipient is established. However, if services are provided to a taxable person's fixed establishment located in a place other than where they are established, the place of supply of those services is that fixed establishment. This is stipulated in Article 28b(1) and (2) of the Polish VAT Act. Similar provisions are to be found in the national laws of other EU member states, such as Belgium’s law cited in the CJEU’s judgment issued in C-232/22.
The tax authorities’ earlier standpoint – few criteria to be met
The Polish tax authorities’ standpoint has been being developed for a long time in line with with the European Court of Justice judgment issued on June 28, 2007 in C-73/06. Referring to the judgments in C-168/84 and C-190/95, the European Court of Justice rules that establishing the existence of a fixed establishment (permanent establishment) requires only minimal permanence through the accumulation of permanent human and technical resources necessary for the supply of specific services. This stance was endorsed by the Polish tax authorities; for example, individual tax rulings issued on behalf of the Minister of Finance by the Director of the Warsaw Tax Office of Appeal (e.g., those of September 12, 2009, no. IPPP1-443-1152/08-2/AK; May 27, 2009, no. IPPP2/443-215/09-2/BM; May 18, 2010, no. IPPP3/443-132/10-7/KG) shared this approach.
It's also worth citing the opinion of the Advocate General (Juliane Kokott) of May 15, 2014 (C-605/12), which states that a fixed establishment means a place characterized by a sufficient degree of permanence and an adequate structure in terms of personnel and technical facilities, enabling the receipt and use of services for the needs of that fixed establishment. A taxable person’s own personnel and technical facilities are not necessary for this purpose, as long as the availability of other facilities is comparable to the availability of their own facilities. Based on this position, Polish tax authorities concluded that for a fixed establishment (with the availability of other facilities) to exist, the taxable person must have control over the subcontractor's personnel and technical facilities; this is the conclusion drawn by the Director of the Tax Office of Appeal in Warsaw in multiple tax rulings (e.g. the tax ruling of February 25, 2016, no. IPPP3/4512-1051/15-4/JŻ; of February 8, 2017, no. 1462-IPPP3.4512.976.2016.1. JF; of July 11, 2017, no. 0114-KDIP1-2.4012.196.2017.1. MC). It follows that an inspection of the subcontractor's facilities was sufficient to demonstrate the presence of a fixed establishment.
Polish tax authorities’ current position
Recent tax rulings state that:
- a fixed establishment must be characterized by a certain degree of commitment to justify the conclusion that the activity carried out there is not transient or periodic;
- the technical infrastructure and personnel must be closely linked with taxable operations carried out; for an entity to have a fixed establishment, a given place must not only use goods and services but also carry out taxable operations;
- if an entity has personnel and a structure (including a technical infrastructure with an adequate degree of permanence) in a given country, it has a fixed establishment in that country; whether these members of staff are employees hired directly by that entity or the entity has their "own" infrastructure is irrelevant;
(cf. the individual tax rulings issued by the Director of the National Tax Information Office of August 1, 2023, no. 0114-KDIP1-2.4012.192.2023.2.RST; of February 24, 2023, no. 0114-KDIP1-2.4012.587.2022.2.JO).
Additionally, the mere creation of a subsidiary in a given country cannot automatically lead to the conclusion that a fixed establishment exists there. What is relevant is the analysis of agreements between companies (parent-subsidiary) and a range of criteria to determine whether the service recipient’s fixed establishment exists (cf. the individual tax ruling issued by the Director of the National Tax Information Office of May 31, 2022, no. 0112-KDIL1-3.4012.581.2021.2.MR).
This view that the tax authorities favour is based on the CJEU case law, which is extensively cited in tax rulings.
What conditions apply
In judgment C-232/22, the CJEU states that Article 44 of the VAT Directive and Article 11 of Implementing Regulation (EU) No 282/2011 should be interpreted in such a way that a taxpayer who is the recipient of services, with their business establishment outside the EU, does not have a fixed establishment in a member state where the service provider (legally distinct from the recipient) is located if the former does not have an appropriate structure in terms of personnel and technical facilities, which could constitute a fixed establishment. This applies even when the service provider undertakes in the contract to provide services involving the manufacturing of goods using third party materials and a number of additional services that contribute to the service recipient's business activity in that member state.
Furthermore, in the judgment of October 22, 2021 (no. I FSK 1519/19), the Supreme Administrative Court of Poland (NSA) refers to the CJEU’s and nationals courts’ case law and states that: • a fixed establishment must be characterized by sufficient permanence, which means an appropriate level of ongoing business operations within the country, along with personnel and a technical structure enabling the taxpayer to supply goods or services in which they participate; • agreements for the service supply and lease agreements concerning technical and personnel facilities that are not to be terminated within a short time are necessary, and the foreign entity must have control over these facilities as if they were the taxpayer's own; • for the place of supply to be identified, the key criterion is where the business is established; other places (including a fixed establishment) are only determined in exceptional situations and cannot be presumed.
A foreign entity’s fixed establishment for VAT purposes in Poland
Per the Polish tax authorities’ prevailing practice, a taxable person has a fixed establishment if the conditions are met concerning primarily the presence of adequate technical and personnel resources, a certain degree of permanence, and independence of the activity conducted there of the main activity (distinct decision-making powers). The fixed establishment must also have the resources and means to be able to effectively provide the services it sells; it is only in this case that it can be considered a fixed establishment for the supply of services (cf. the NSA judgment of October 3, 2019, no. I FSK 980/17). It should also be emphasized that the current judicial practice is influenced by the definition provided in Article 11 of Implementing Regulation (EU) No 282/2011.
The cited CJEU judgment of June 29, 2023 (C-232/22) confirms the approach that has been developed over the past few years, which says that a fixed establishment should have the features listed above. Therefore, it's not sufficient, for example, to establish a subsidiary in the subcontractor’s country (Poland), ensure minimal permanence solely through the accumulation of human and technical resources, or have mere economic control over the subcontractor's facilities. The prevailing judicial practice will help taxable persons outsourcing services in other countries more precisely define the terms under which the services are to be provided in respect of potential tax duties arising from the operations carried on at a fixed establishment.
In the eyes of an EY expert
Despite extensive case law that is available on this topic, determining whether a foreign entity has a fixed establishment for VAT purposes in Poland is still an issue that raises many doubts; taxable persons often consider seeking an individual tax ruling to ensure the proper VAT treatment of transactions carried out in Poland. Until now, any incorrect tax treatment has usually entailed the requirement that one party to the transaction correct the sales invoices issued and pay interest on tax arrears; for both parties, this meant correcting their VAT declarations (currently in electronic form, i.e. as a JPK file – JPK_V7M), and the situation could have become even more complicated if, for instance, either entity had been dissolved in the meantime.
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Summary
Currently, the analysis and identification of a foreign entity’s fixed establishment for VAT purposes in Poland will attract more attention again—this time as a result of the introduction of mandatory e-invoices scheduled to take effect in Poland on July 1, 2024. This requirement will affect not only Polish companies (i.e. those established in Poland) but also foreign entities that:
- conduct business operations in Poland through branches/subsidiaries; and
- are registered for VAT in Poland and do not have a separate legal form (a branch/subsidiary), yet meet the criteria of having a fixed establishment for VAT purposes in Poland.
For companies still uncertain about whether they belong to one of these groups, it’s time now to revisit the issue and set out further actions to reduce tax risks and protect the company against financial consequences such as penalties.
Although the implementation of structured e-invoices may bring companies various benefits, it often presents a significant challenge and requires substantial investments. Therefore, what is recommended is to make an informed decision on whether to implement e-invoicing, considering the regulatory frameworks and potential duties that apply.
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