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When will you settle VAT in Poland?
A Fixed Establishment (FE) is a VAT mechanism that triggers the obligation to account for VAT in a country where a business operates, other than the country of its registered office. In other words, having an FE abroad necessitates compliance with the VAT regulations of that country.
What is an FE?
The definition of a fixed establishment is provided in Article 11 of Council Regulation (EU) No 282/2011 of 15 March 2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax. This provision states that an FE means any fixed place of business, other than the place of the taxpayer’s registered office as referred to in Article 10 of this Regulation (i.e., the place where the top management functions of the undertaking are exercised), which is equipped with the necessary staff and technical means to carry out its activity.
Consequences of having an FE
Having an FE in another country means being treated as a local taxpayer. In such a situation, services purchased by the FE from local suppliers are not considered exports but domestic supplies and are taxed locally. Similarly, sales on the domestic market will require VAT to be accounted for in the same way as a taxpayer with a registered office in that country.
Characteristics of an FE
Based on the definition above, the following characteristics of an FE must be present:
- Adequate staff
- Adequate technical means
- Permanence of staff and technical means
- Ability to receive and use services or supply services
FE vs. PE
The characteristics of a fixed establishment are somewhat similar to a permanent establishment (PE) for income tax purposes (we wrote about PE here). However, they are two distinct concepts, and both do not always occur simultaneously. FE and PE have in common that they can arise without the intention of the taxpayer, independently of them. For example, cooperation with a contract manufacturer, a logistics center, or having a shared service center may result in the creation of a permanent establishment or a fixed establishment.
Staff and technical means of a permanent nature
In this context, it means that the taxpayer must have adequate human and technical resources to carry out its activities. Importantly, the taxpayer must have the staff and technical means at its disposal as if they were its own. This means that giving binding instructions, having other people’s employees and a place at one’s disposal may involve fulfilling the conditions of the regulation regarding FEs.
It is worth citing the judgment of the CJEU in case C-333/20 Berlin Chemie:
While having one’s own staff and technical means is not necessary to be able to consider that a taxpayer has an adequate structure which is characterized by sufficient permanence with regard to staff and technical means in another Member State, it is however necessary that that taxpayer is entitled to dispose of that staff and those technical means in the same way as if they were its own, for example, on the basis of service or leasing contracts under which that staff and those technical means would be placed at the disposal of the taxpayer and which contracts could not be terminated at short notice.
Thus, the Court ruled that the creation of an FE requires a broad range of powers to dispose of staff and technical means in another country. Furthermore, such entitlement must exist for a longer period of time.
Ability of the FE to receive and supply services
A fixed establishment must be an entity capable of receiving and using the services it purchases and of supplying them. The idea is that the entity can function as a separate, independent taxpayer. Therefore, a subsidiary that is only able to provide a part of the entire service should not be treated as a fixed establishment. However, it should always be verified whether a particular ancillary service does not have an independent economic purpose (as in the case of, for example, shared service centers).
A fixed establishment cannot simultaneously provide and receive the same services. This specifically concerns the situation of cooperation between a foreign taxpayer and a domestic entity (e.g., in the field of logistics services). The tax authorities considered the domestic service provider to be an FE of the foreign taxpayer. The tax authorities argued that the foreign taxpayer’s control over the purchased logistics services was as strict as in the case of an ownership relationship, which was supposed to mean the ability to provide services. At the same time, the fact of purchasing logistics services from a domestic entity indicated the FE’s ability to receive and use services.
Fortunately, the CJEU in the Berlin Chemie judgment rejected such reasoning, stating that the same resources cannot simultaneously serve to provide and receive the same services. Consequently, there can be no question of an FE. The above reasoning has also been reflected in Polish case law (e.g., the judgment of the NSA of 19 May 2022, file no. I FSK 968/20).
Consequences of having an FE in another country
Generally speaking, having a fixed establishment abroad means that the taxpayer is treated as a domestic entity and is subject to domestic VAT law. Services and goods purchased in a given country for use by the FE constitute domestic supplies. The principle of taxation in the country of the customer is excluded. An FE in Poland will mean the need to comply with the VAT Act, including, among other things, split payment, KSEF, and fiscal receipts.
Failure to identify the existence of a “fixed establishment” or the erroneous assumption that such a place exists in Poland may lead to the need to pay outstanding VAT, the challenge of the right to deduct VAT, and the imposition of criminal and fiscal penalties. Moreover, business relationships with counterparties may suffer, as transactions with them will have to be settled on different terms.
Therefore, we invite you to contact us to identify the risk of having or creating a fixed establishment in Poland or abroad. We will also help you minimize the risk of disputes with tax authorities in this area. Finally, we are able to support the operation of FEs in Poland.
