Automatic installations as fixed establishments

Facts

A municipality with a VAT registration number, which carried out both economic and non-economic activities, operated a sewage treatment plant. The resulting sewage sludge was dried by the German branch of A-KG – which had established his business in Austria – on behalf of the municipality using a drying plant installed on the municipality’s premises and subsequently disposed of. The drying plant operated largely automatically. A-KG commissioned the German company B-GmbH to carry out the work that was nevertheless necessary on site; B-GmbH transported the sewage sludge to the plant, removed it after drying and subsequently disposed of it. Beyond that, the plant was remotely controlled, monitored and maintained by A-KG from Austria. Later, the municipality entered into a new contract covering the same activities with C-GmbH, which also had established his business in Austria and likewise engaged B-GmbH as a subcontractor.

Question referred for a preliminary ruling and the BFH’s considerations

The BFH has referred the question to the ECJ for a preliminary ruling whether the drying plant constitutes a fixed establishment, such that the services provided by A-KG and, later, by C-GmbH that are taxable in Germany are not subject to the reverse-charge mechanism. The BFH has doubts whether the personnel and technical resources required for a fixed establishment are present, given that the drying plant is essentially monitored and maintained remotely from Austria and, moreover, a subcontractor is engaged.

The BFH raises the issue that the service in question – the disposal of sewage sludge – is not provided entirely by the potential fixed establishment, as the drying plant only carries out the drying process, whilst the disposal takes place outside the plant. It may be inferred from previous ECJ case-law that the service must be provided entirely by the fixed establishment in order for it to result in a status of residence that excludes the reverse-charge mechanism. This must be clarified as a preliminary issue.

If, however, it is to be assumed that the drying plant is involved in the disposal services, the question of staffing arises. Both the wording of Article 11(2) and Article 53 of the VAT Implementing Regulation, as well as the ECJ judgment in Titanium (C-931/19), suggest that a fixed establishment must have its own staff. In the Titanium case, the taxable person maintained a rented property in Austria, but all key decisions were taken from Jersey. The ECJ had ruled that this did not constitute a fixed establishment. The present case is therefore comparable. However, it is questionable whether this view is still appropriate in light of technological developments, as the deployment of staff is increasingly being replaced by the use of machinery. The Titanium judgment could also be interpreted to mean that a fixed establishment should only be recognised if the decision to provide services is taken by staff working at the premises.

It should also be borne in mind that, according to the case law of the ECJ, a fixed establishment should only be recognised if linking the activity to the place where the taxable person has established his business would not lead to a reasonable solution or would result in a conflict with another Member State. With regard to the reverse-charge mechanism, it seems questionable to designate a facility consisting solely of technical equipment as the person liable for VAT.

If one were to regard the presence of staff as mandatory, even if it were not necessary for the provision of the specific service, it would be doubtful as to what requirements should be imposed in this regard. It is clear that no staff of one’s own is required, but rather that it is sufficient for the taxable person to have access to such personnel as if it were their own. However, it is unclear what standard should be applied in this regard. The Federal Fiscal Court (BFH) considers it possible that this would require a right to issue instructions to the staff, which is not the case here in the relationship between the local authority and the subcontractor’s staff.

Analysis

The ECJ has not yet had to rule on whether a fixed establishment must provide the service in question in its entirety in order to exclude the reverse-charge mechanism. However, as the Federal Fiscal Court (BFH) has also suggested, the fact that technical installations without staff result in the operator being liable for VAT would run counter to the purpose of the reverse-charge mechanism. Accordingly, those who are not present in the Member State in question should be relieved of VAT obligations.

The fact that a fixed establishment must have not only technical but also human resources in order to exclude the reverse-charge mechanism follows from Article 53 of the VAT Implementing Regulation. However, the wording of the provision certainly leaves room for interpretation. A taxable person’s fixed establishment is “taken into consideration only when it is characterised by sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to make the supply of goods or services in which it intervenes.” In our view, this allows for the interpretation that staff are necessary only to the extent required by the supply; however, the ECJ has never yet had to rule on this point.

Depending on how the ECJ rules, a reassessment of the wind turbine cases may be necessary. Various tax courts in Germany had ruled that wind turbines could constitute fixed establishments of companies resident abroad, even though the turbines operate autonomously without any staff at all. Following the ECJ’s ruling in the Titanium case, the prevailing view in the VAT world was that this position was no longer tenable. The current referral to the ECJ will hopefully provide clarity.

Author: Nadia Schulte