Fixed establishment for VAT purposes

A fixed establishment is a concept for tax purposes and is automatically assumed by tax authorities when the human and material resources of a business in another country is of a certain permanence. There are many ways in which a business can expand abroad without setting up a foreign subsidiary.

Common activities include:

• renting storage space to store and deliver goods;
• using sale representatives to provide information and boost sales abroad;
• providing ancillary or auxiliary operations to the main activities of the head office; or
• setting up a branch, with its own staff and working facilities, such as a factory or an office. 

All these activities can lead to the emergence of a fixed establishment for VAT purposes in the other country. 

Having a fixed establishment in the Netherlands can have consequences for locating the place of supply for VAT purposes regarding the supplies made to and from the country. This in turn can lead to an obligation to register in the country for VAT purposes and to submit a periodical VAT return. Fixed establishments also have consequences for the right to deduct VAT on business expenses and whether or not the VAT levy is reverse charged to Dutch entrepreneurs who purchase services from the foreign entrepreneur. 

Fixed establishment vs. permanent establishment

The concept of a fixed establishment is similar, but not identical to the concept of a permanent establishment for income tax. According to EU regulation and jurisprudence of the European Court of Justice (ECJ), a VAT fixed establishment is characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to 1) provide its services to third parties; or 2) receive and use the services supplied to it for its own needs. It is an establishment of a head office located in another country, which can be located inside or outside the EU.

The concept of a fixed establishment for VAT purposes is less defined than that of a permanent establishment for the income tax. For one, it is only since 2011 that the concept has been given a legal basis in EU VAT regulation and still, most of the – often important – details are (to be) decided by ECJ case law. Also complicating a clear definition is the fact that Member States of the EU can to a certain degree determine specifics about the definition in their national legislation. 

A fixed establishment for VAT purposes

A fixed establishment for VAT purposes is a company’s secondary place of business that is located in another country than where its primary establishment is located (i.e. its head office). The presence of human and material resources needs to be located in a fixed place of business, which can be an office or a factory, or any other physical place that can provide some permanence to the presence. In addition, in contrast to the permanent establishment for the income tax, a fixed establishment for VAT purposes cannot exist without the use of own personnel. For example, when a foreign company rents production space in another country and places machinery there but uses locally hired personnel to make use of the facilities, still no fixed establishment is present in that country. 

The head office and the fixed establishment generally form a single legal entity together, despite the fact that VAT returns are to be filed independently by both the head office and the fixed establishment. Dealings between the fixed establishment and the head office are in principle not visible for VAT. 

Dutch sales and purchase fixed establishments

In line with the definition of a fixed establishment according to EU regulation mentioned earlier, Dutch VAT regulation identifies two types of fixed establishments. Sales, or ‘regular’, fixed establishments provide goods and services to third parties (notice, however, that in the Dutch definition of a regular fixed establishment vis-à-vis the definition in EU regulation also the supply of goods can lead to the emergence of one). When the presence does not act towards third parties, but only supports its head office, e.g. with marketing, administration or the storage of goods, no sales fixed establishment can exist. However, such presence can still be considered a purchase fixed establishment if it procures services from third parties for its own needs. 

Place of supply of services

The supply of services between businesses (B2B services) is in principle taxed at the buyer’s place of establishment, while services supplied to customers (B2C services) are taxed at the supplier’s place of establishment. For B2C sales, it is therefore necessary to determine whether a sale fixed establishment exists. The existence of it would mean that the invoice should be sent from the fixed establishment and not the head office and the VAT should be calculated and declared in the country of the fixed establishment. 

For B2B purchases it is relevant to determine whether both types of fixed establishment exist. The existence of it could change the location of the taxable supply from the head office to the fixed establishment. This in turn would mean that the name of the fixed establishment would need to appear on the invoice and local VAT should be calculated. In case the selling business is located in another EU country outside the Member State where the fixed establishment is situated, the VAT will be reverse charged to the fixed establishment, which in turn becomes responsible for declaring the rightly calculated amount of VAT to the tax authorities. 

International trade of goods

With regard to the international trade in goods, an advantage of having a fixed establishment in the Netherlands is that it permits a foreign entrepreneur to apply for a VAT deferment license. With this license (a so-called Article 23 license), import VAT can be declared in the periodical VAT returns instead of directly when the goods enter the Netherlands. Insofar a right to deduction of VAT exists, foreign entrepreneurs without the license have a cash flow disadvantage when importing as it can take months to reclaim the pre-financed VAT, whereas the license allows foreign entrepreneurs to reclaim the VAT in the same VAT return. 

A foreign entrepreneur with a fixed establishment in the Netherlands can also apply for a permit for a VAT warehouse. This allows certain goods to be supplied at zero rate/exemption with a right to deduct VAT. A fixed establishment in the Netherlands may also have consequences for the application of the simplification for call-off stock. This simplification can no longer be applied in the Netherlands if the supplier has a fixed establishment in the Netherlands. 

VAT registration

An entrepreneur with a sales fixed establishment will have to register in the Netherlands with the Dutch Tax Authorities of the area where the fixed establishment is situated. The fixed establishment will need to submit a VAT return periodically and will have to comply with the administrative and invoicing obligations in the Netherlands. 

For a purchase fixed establishment, there are two possibilities. Either the purchase fixed establishment only procures services and goods from Dutch entrepreneurs and therefore only incurs Dutch VAT. The Dutch VAT is declared by the Dutch entrepreneurs and no VAT registration of the purchase fixed establishment is needed in the Netherlands. If the head office is located in another EU country, this VAT can be reclaimed by the head office applying to its own tax authorities. If the head office is located outside the EU, a refund application can be submitted in writing to the Dutch Tax Authorities, kantoor Buitenland.  

It is also possible that the fixed establishment procures services from other, non-Dutch, entrepreneurs located elsewhere in the EU. In that case, the reverse charge mechanism applies and the purchase fixed establishment becomes liable to pay the VAT in a Dutch tax return. As a consequence, the purchase fixed establishment should in fact register for VAT with the Dutch Tax Authorities, at the Foreign Office (or “kantoor Buitenland”). Via this registration, the entrepreneur will declare the reverse-charged VAT and deduct it via the same return if and insofar as the entrepreneur is entitled to deduct input tax. 

VAT recovery

In general, a fixed establishment can recover input VAT incurred on their expenses to the extent those expenses are attributable to VAT taxed business activities. However, the right to recover can be complicated and limited if a fixed establishment incurs expenses that are (also) used for the activities of its foreign head office, and vice-versa. According to the Dutch State Secretary of Finance, the VAT recovery should then be based on the VAT rules of both the country of the fixed establishment and of the head office based on the activities by both the fixed establishment and the head office. This is actually a double test to see if a right to deduct exists and this may lead to a limitation of VAT recovery. 

Fixed establishment in VAT group

If a fixed establishment in the Netherlands is part of a VAT group in the Netherlands, both the fixed establishment and the head office are part of the group. The same applies to a head office established in the Netherlands and its foreign fixed establishment(s) if the head office is part of a VAT group in the Netherlands. This means, amongst other things, that the dealings between the VAT group, the (foreign) fixed establishment and the (foreign) head office are disregarded for VAT purposes. 

Want to know more?

If you’d like to know more about whether your business activities are considered a fixed establishment for VAT purposes, please feel free contact our VAT specialists today.