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European tax law – When does a business owner have a fixed establishment?

A matter that is often disputed with fiscal authorities is the question of the circumstances under which a German parent company would create another fixed establishment abroad in addition to its foreign subsidiary. In a recent case, the ECJ had to rule on whether a Romanian company supplied services itself to its German parent company, or whether these had been supplied by a fixed establishment that the German parent company has in Romania. When determining VAT, the place of supply of the services matters.


Under Article 44 of the EU Directive on the common system of value added tax, the place of supply of the services will be mainly determined by the place where the recipient of the supply has established their business. However, if those services are provided to a taxpayer’s fixed establishment then the place of supply of the services will be deemed to be where that fixed establishment is located. It is thus questionable if and under what circumstances another fixed establishment would be created abroad for a German parent company in addition to its foreign subsidiary. 

The issue 

In the case in question, of 7.4.2022 (case reference: C-333/20), a Romanian subsidiary had taken legal action. Its German parent company markets pharmaceutical products in Romania and had concluded a storage contract with the subsidiary. The Romanian company’s main activity consisted in exclusive marketing, regulatory, advertising and representation services. The companies concluded a contract under which the Romanian company undertook to actively promote the products of the German company in Romania. So, the Romanian company invoiced the services in question to the German company exclusive of VAT because it assumed that the place of supply of those services was in Germany.

However, following a tax inspection, the Romanian tax authority determined that the services supplied by the Romanian company to the German company were received by the latter in Romania, where the German company had a fixed establishment. The German company had sufficient technical and human resources in order to supply periodic taxable services. 

The ruling by the ECJ 

The ECJ stressed that the existence, in the territory of a Member State, of a fixed establishment of a company established in another Member State may not be deduced merely from the fact that that company has a subsidiary there. The classification of an establishment as a fixed establishment of a parent company cannot depend solely on its association under company law with another taxpayer.

Instead, for the ECJ, when it comes to creating a fixed establishment abroad the following factors, in particular, would need to be considered. 

  • The existence of a minimum degree of stability derived from the permanent presence of both the human and technical resources necessary for the provision of the specific services.
  • The taxpayer has to have the right to dispose of those human and technical resources in the same way as if they were their own. 
  • Examples that might be cited here include service and leasing agreements on the basis of which those resources are made available to them and cannot be terminated at short notice.
  • The establishment has to be able both to receive the services that are supplied for its own use and utilise them there. 
  • The same resources cannot be used both to supply and receive the same services. 
  • Furthermore, other requirements are the direct involvement by the foreign company in the sale and supply of products as well as entering into commitments with third parties in the name of the German company. 

In the case in question, the ECJ pointed out that the services supplied by the Romanian company for the German company were principally intended to provide better information to professionals in the field of health and to consumers, in Romania, on the pharmaceutical products sold by that German company. The Romanian company was not directly involved in the sale and supply of products and did not enter into commitments with third parties in the name of the German company.

Outcome: The company in Romania thus did not have a sufficient degree of permanence and a suitable structure in terms of human and technical resources so that it was not possible to assume that it was a fixed establishment.

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