ECJ rules on definition of fixed establishment: taxable person carrying out only technical testing or research work in another Member State does not have a “fixed establishment from which business transactions are effected”

(a) Facts:

In C-318/11, Daimler AG (Daimler) is a company having the seat of its economic activity in Germany and carrying out winter testing of cars in Sweden. Daimler does not carry out any activity subject to VAT at the installations in Sweden, but has a wholly-owned subsidiary there which provides it with premises, test tracks and related services. Daimler applied for a refund of input VAT paid on the purchases it had made, which had not been used for any activity subject to VAT in Sweden (i.e. the testing of cars).

In C-319/11, Widex A/S (Widex) is a company established in Denmark manufacturing hearing aids and has a research centre in Sweden carrying out research into audiology, which constitutes a division within Widex. Widex acquires goods and services for the research activity which it carries out in its division in Sweden. Widex also has a subsidiary in Sweden which sells and distributes its goods in Sweden, but the subsidiary operates totally independently from the research activities of the division.

The Swedish tax authorities rejected Daimler’s and Widex’s applications for the refund of VAT paid in Sweden on the grounds that the applicants have a fixed establishment in Sweden.

(b) Legal background: Under articles 170 and 171 of the EU VAT Directive (2006/112) taxable persons who are not established in the Member State in which they purchase goods and services or import goods subject to VAT but are established in another Member State may obtain a refund of that VAT in so far as the goods and services are used for the purposes of certain specific transactions. Under article 1 of the Eighth VAT Directive (79/1072) and, now, under article 3 of the Directive 2008/9, a taxable person is not established within a Member State and qualifies for a refund of input VAT if that person has neither the seat of his economic activity, nor a fixed establishment from which business transactions are affected in that particular Member State.

(c) Issue:

The issue was whether a taxable person for VAT established in one Member State and carrying out in another Member State only technical testing or research work, not including taxable transactions, can be regarded as having in that other Member State a “fixed establishment from which business transactions are effected” within the meaning of article 1 of the Eighth Directive and, now, in article 3(a) of Directive 2008/9 and as such be denied the right to refund of VAT in that State.

(d) Decision:

The ECJ pointed out that the criterion under which a refund of VAT can be denied due to the fact that there is a “fixed establishment from which business transactions are effected” includes two cumulative conditions: firstly, the existence of a “fixed establishment”; and secondly that “transactions” are carried out from that establishment. By referring to Commission v. Italy (Case C-244/08), the ECJ emphasised that the expression “fixed establishment from which business transactions are effected”, must be interpreted as regarding a non-resident taxable person as a person who does not have a fixed establishment carrying out taxable transactions in general. The existence of active transactions in the Member State concerned constitutes the determining factor for exclusion of the right to refund of VAT. Furthermore, the term “transactions” used in the phrase “from which business transactions are effected” can affect only output transactions. Consequently, in order to deny the right to refund, taxable transactions must actually be carried out by the fixed establishment in the State where the application for refund is made, while the mere ability to carry out such transactions does not suffice. In the cases at hand, it is not in dispute that the undertakings concerned do not carry out input taxable transactions in the Member State where the refund applications have been made through their technical testing and research departments. As such, a right to refund of the output VAT paid must be granted. As this criterion is cumulative, there is no need to examine whether Daimler and Widex do actually have a “fixed establishment”. The purpose of the Directives is to enable taxable persons to obtain a refund of the output VAT where they could not deduct output VAT paid from input VAT due because they have no active taxable transactions in the Member State of refund. The actual carrying out of taxable transactions in the Member State of refund is therefore the common requirement for excluding the right to refund, whether or not the applicant taxable person has a fixed establishment in that State.

The ECJ concluded that a taxable person for VAT established in one Member State and carrying out in another Member State only technical testing or research work, not including taxable transactions, cannot be regarded as having in the other Member State a “fixed establishment from which business transactions are effected” within the meaning of article 1 of the Eighth Directive and article 3(a) of Directive 2008/9.

In respect of the third question in Case C-318/11 on whether the fact that the taxable person has in the Member State where it has applied for the refund a wholly-owned subsidiary whose purpose is almost exclusively to supply the person with services in respect of technical testing activity influences the interpretation given to the concept of “fixed establishment from which business transactions are affected”, the ECJ noted that a subsidiary is a taxable person on its own account and that the purchases of goods and services in the main proceedings were not made by it. The case at hand also differed from DFDS (Case C-260/95) where the independent status of the subsidiary was disregarded due to the commercial reality under which both the parent and the subsidiary had carried out the active taxable transactions of supplies of services in the Member State concerned. The condition that there are active input taxable transactions carried out by the technical department is not met and hence the existence of a wholly-owned subsidiary did not influence the interpretation given to the concept.