Identifying the place of establishment of the parties to a transaction can be crucial in determining the jurisdiction where VAT is due on a supply, as well as the person who is obliged to account and pay such VAT. In some cases determining the place of establishment may not be a straightforward matter, since this does not necessarily follow the jurisdiction of establishment.
Council Directive 2006/112/EC (the “EU VAT Directive”) as well as the Maltese Value Added Tax Act both lay down the rules applicable to the place of supply of services. In both instances, the rules take into consideration whether the customer is another taxable person (i.e. a person carrying on an economic activity - and thus a B2B supply) or a non-taxable end-customer (i.e. a B2C supply). These place of supply rules for services can be summarised as follows:
It is evident that both Place of Establishment (PoE) and Place of Fixed Establishment (PFE) are very relevant in determining the place of supply of services.
Council Implementing Regulation (EU) 282/2011 (the “Implementing Regulation”) defines the place of establishment as “the place where . . . the functions of the business's central administration are carried out”. To determine the place of establishment, account is therefore taken of the place where:
the essential decisions concerning the general management of the business are taken;
the place where the registered office of the business is located; and
the place where management meets.
Where two or more of the said criteria point to different jurisdictions, the Implementing Regulation provides that the place where decisions concerning the general management of the business are taken should take precedence.
The Implementing Regulation also provides that the mere presence of a postal address may not be taken to be the place of establishment of a business of a taxable person and that having a VAT number is not sufficient to prove the existence of a fixed establishment.
Furthermore, it is also possible for an entity to have a set-up in other jurisdictions besides that of its place of establishment. In a complex world where ever more innovative solutions are being implemented in a business’ day-to-day operations (not least working from home in a post-COVID reality), it is also possible for an entity to have various forms of presence in a number of jurisdictions.
From a VAT perspective, such setups in jurisdictions different from that where an entity is established may also be relevant for VAT purposes since they might constitute a fixed establishment. The Implementing Regulation defines a fixed establishment to be any establishment, other than the place of establishment of a business, characterised by:
a sufficient degree of permanence; and
a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs or to enable it to provide the services which it supplies.
Although the definition and the clarifications of the concept of fixed establishment have been further addressed in numerous judgments of the Court of Justice of the European Union, it remains a matter of some uncertainty not only because interpretations of the rules are subjective but also because, in any given transaction, the full fact pattern of the establishment of the counterparty may not be fully evident.
In the light of the above, it is important to take in consideration the logistical changes in business processes and set ups, such as people working away from offices and employees working from their home country (and away from the place of establishment of the business) brought about by various global events such as the pandemic, supply chain challenges and a war in the European continent. Such changes may result in a shift in the place where supplies are deemed to take place and may therefore lead to VAT reporting and collection obligations in new jurisdictions.
Contact us
