Fixed establishment for VAT purposes

The VAT fixed establishment concept sits at the intersection of tax law and business substance. If you run a business that operates across borders, few VAT concepts matter as much, or cause as much confusion, as a “fixed establishment” (FE).

Understanding whether your business has a fixed establishment in another country can be important in determining where VAT is due, whether a VAT registration is required and how cross-border supplies should be treated.

Get it wrong and you could end up charging VAT incorrectly, registering in the wrong country or missing a VAT registration obligation entirely.

The following is a practical guide to what a fixed establishment means for VAT purposes, how it is determined and why it matters for businesses operating internationally.

What is a fixed establishment for VAT purposes?

A fixed establishment (FE) is a place of business, other than a company’s head office or “place of establishment”, that has a sufficient degree of permanence and a suitable structure in terms of human and technical resources to receive and use services (or supply and receive goods/services) for its own needs.

That definition comes from Article 11 of EU Implementing Regulation 282/2011, which was developed from decades of case law from the Court of Justice of the European Union (CJEU). Following Brexit, it was adopted into UK legislation as assimilated EU law.

The key point is that an FE is not the same as a subsidiary, branch or registered office. It is a functional concept based on substance, not legal form.

Why does fixed establishment matter for VAT?

Broadly, VAT is a destination-based tax on the supply of goods and services, and the rules require a clear answer to one question: where is the supply taxed?

For services, the default rule for B2B transactions is the place where the customer is established. But businesses often have operations in multiple countries, such as a head office in one, a warehouse in another and sales staff in a third.

The FE concept exists to determine which “establishment” should be treated as receiving or making the supply when a business has a presence in more than one jurisdiction. Get the FE analysis wrong, and the wrong country’s VAT rules, rates and registration obligations may apply.

How do you determine whether a fixed establishment exists?

The overall trend in recent case law has been to narrow the concept of FE, pushing back against the tendency of some tax authorities to find an FE too readily based on outsourcing or toll manufacturing arrangements.

In trying to reach a decision on whether an organisation can be regarded as having an FE in the relevant geographical location, I would suggest carrying out a two-part test, developed from a combination of case law and the implementing regulations.

1. Is the presence sufficiently permanent?

The first consideration is whether the taxpayer’s presence in the relevant location is of sufficient permanence. It cannot be temporary or fleeting. For instance, a pop-up stand at a trade show generally won’t qualify. The arrangement needs some durability and stability over time.

2. Does the business have sufficient human and technical resources?

The second consideration is whether, in the relevant geographical location, the establishment has its own resources, including staff (even if that is through a service or staffing contract) and infrastructure such as equipment, systems and premises.These resources need to be sufficient either to:

• use services for the establishment’s own needs, for B2B “receiving” purposes; or
• independently supply goods or services, for “supplying” purposes.

Crucially, those resources do not need to be owned by the company. Contracted out or leased resources can count towards this requirement, provided the business has sufficient control over them to use them as if they were its own. This slight nuance has, to date, continued to generate significant litigation.

Why does a fixed establishment matter in practice?

There are several reasons why it is important for businesses operating across borders to understand the FE concept and ensure their VAT treatment is correct.

Correct VAT treatment of cross-border services

In general, if a B2B supply of services is made to a customer’s FE in a different country, rather than the country where it has its head office, the place of supply and therefore the VAT rules and potentially the VAT rate change accordingly.

VAT registration obligations

Having an FE in another country can trigger local VAT registration obligations, even without a subsidiary or branch. Conversely, incorrectly assuming an FE exists can lead to unnecessary registrations and/or missed obligations if one is incorrectly ruled out.

Right to deduct input VAT on expenditure

Having an FE can affect where input VAT is recoverable and through which mechanism, such as a domestic VAT return or the cross-border refund procedure. This can have real cash-flow implications.

Reverse charge and self-billing

Whether the reverse charge mechanism applies to a transaction often hinges on whether the supplier or customer has an FE in the relevant jurisdiction. This issue featured prominently in a VAT review we recently carried out on a company providing B2C education over the internet to students located both in the UK and across the EU.

It had always incorrectly assumed it did not have a liability to register for VAT in the UK but was caught out by the operation of the reverse charge mechanism.

Toll manufacturing, warehousing and staff secondment

Some common commercial arrangements, such as (i) using a third-party manufacturer; (ii) a fulfilment warehouse; or (iii) seconded staff; are exactly where FE risks arise most often. This is because they blur the line between “using a service provider” and “having your own establishment.”

Considerations for businesses

Businesses with international operations should consider the following:

• Map where you have people, equipment or contracted resources operating with real permanence, rather than looking only at where legal entities are located.
• Review service and outsourcing contracts carefully. Exclusivity or economic dependence alone doesn’t create an FE, but a lack of genuine independence in the arrangement might.
• Don’t assume a warehouse, server or local agent automatically creates or avoids an FE. The analysis is fact-specific and resource-based.
• Revisit your VAT position periodically, especially as case law continues to evolve and refine the boundaries of the concept.
• Seek advice before restructuring supply chains, entering toll manufacturing arrangements or expanding into new markets. FE determinations are highly fact-dependent and the consequences, including double taxation, penalties and denied deductions, can be significant.

Need advice on VAT and fixed establishments?

Determining whether a business has a fixed establishment is rarely as simple as identifying whether it has an office or legal entity in another country. The VAT treatment depends on the substance of the arrangement, the resources available to the business and how those resources are used.

For businesses operating internationally, reviewing these arrangements before entering a new market or changing a supply chain can help identify potential VAT registration and compliance obligations at an early stage.

If your business needs to assess their cross-border arrangements and determine whether a fixed establishment could exist, please get in touch with our VAT team.