Does a Subsidiary Constitute a Fixed Establishment for VAT Purposes?
The CJEU’s Ruling in Dong Yang Electronics (C-547/18) and the Limits of a Service Provider’s Duty of Inquiry
The establishment of subsidiaries in foreign jurisdictions is among the most elementary features of international corporate organization. Multinational enterprises routinely incorporate locally formed entities — typically limited liability companies or their functional equivalents — in the markets where they conduct significant commercial operations. The question that arises, with considerable frequency and limited doctrinal clarity, is whether the mere existence of such a subsidiary in an EU Member State suffices to attribute to the parent company a “fixed establishment” (stałe miejsce prowadzenia działalności gospodarczej) for the purposes of value added tax.
The concept of a fixed establishment operates within the VAT framework as the functional analogue to the “permanent establishment” threshold that governs the allocation of taxing rights under double taxation treaties and direct tax legislation. Its identification determines where a given service transaction is subject to VAT — and, by extension, whether the reverse charge mechanism shifts the compliance burden from the supplier to the recipient. The interpretive boundaries of this concept remain imperfectly systematized, generating recurrent practical difficulties in the administration of cross-border VAT, particularly where the entities involved are established outside the European Union.
The Court of Justice of the European Union addressed this question directly in its judgment of 7 May 2020 in Dong Yang Electronics sp. z o.o. v. Dyrektor Izby Administracji Skarbowej we Wrocławiu, Case C-547/18, ECLI:EU:C:2020:350 — a decision that, while parsimonious in its reasoning, establishes two propositions of considerable practical consequence.
I. The Facts: A Korean Principal, a Polish Subsidiary, and a Polish Service Provider
The dispute concerned Dong Yang Electronics sp. z o.o. (“Dong Yang”), a company incorporated under Polish law that, pursuant to a contract dated 27 October 2010, provided printed circuit board (“PCB”) assembly services to LG Display Co. Ltd. (“LG Korea”), a company established and managed in Seoul, Republic of Korea. The materials and components required for PCB assembly — which remained the property of LG Korea throughout the production process — were delivered to Dong Yang by LG Display Polska sp. z o.o. (“LG Polska”), a Polish subsidiary of LG Korea (paragraphs 8–9).
LG Polska maintained its own production facilities, held a separate VAT identification number, and possessed legal personality distinct from that of LG Korea. Upon completion, the assembled PCBs were returned to LG Polska, which utilized them in the manufacture of TFT LCD modules — themselves the property of LG Korea — subsequently delivered to LG Display Germany GmbH (paragraphs 10–11).
LG Korea represented to Dong Yang that it did not maintain a fixed establishment in Poland, did not employ any personnel on Polish territory, and did not possess any immovable property or technical infrastructure there (paragraph 13). In reliance on this representation, Dong Yang invoiced LG Korea for the assembly services without charging Polish VAT, treating the place of supply as falling outside Poland.
The Polish tax authority (Dyrektor Izby Administracji Skarbowej we Wrocławiu) took a contrary view. It determined that LG Polska constituted a fixed establishment of LG Korea in Poland, with the consequence that the assembly services performed by Dong Yang were subject to Polish VAT. The authority reasoned that LG Korea, through its contractual arrangements with LG Polska, effectively utilized the subsidiary as its own place of business (paragraphs 14–15). Dong Yang, the authority argued, should not have relied solely on LG Korea’s self-certification but should instead have investigated, pursuant to Article 22 of Implementing Regulation No 282/2011, the identity of the actual beneficiary of its services (paragraph 16).
II. The Preliminary Reference
The Wojewódzki Sąd Administracyjny we Wrocławiu (Regional Administrative Court, Wrocław, Poland) referred two questions to the CJEU. First, whether the mere fact that a company established outside the EU possesses a subsidiary in Poland suffices to establish the existence of a fixed establishment in that Member State within the meaning of Article 44 of Directive 2006/112/EC and Article 11(1) of Implementing Regulation No 282/2011. Second — in the event of a negative answer — whether the service provider is obliged to analyze the contractual relations between the third-country parent and its subsidiary in order to determine whether the parent maintains a fixed establishment in that Member State (paragraph 22).
The Third-Country Dimension: Market Access Constraints as Context
The factual matrix presented a distinctive feature that merited separate analytical attention. LG Korea, as a company incorporated under Korean law, does not benefit from the freedoms guaranteed by the Treaty on the Functioning of the European Union. Under the EU–Korea Free Trade Agreement, Korean investors may undertake and carry on economic activity in Poland exclusively through designated corporate forms — including the limited liability company (spółka z ograniczoną odpowiedzialnością) and the joint-stock company (spółka akcyjna) — but not through a branch of a foreign company established directly in the host state (paragraph 29). This structural constraint, the referring court observed, meant that a company from a third country effectively must operate through a subsidiary, raising the question whether such mandatory intermediation creates an irrebuttable presumption of a fixed establishment (paragraphs 18–19).
III. The Court’s Reasoning
A. Corporate Status Alone Is Insufficient: The Substance-Over-Form Principle
The Court answered both questions in the negative. On the first question, it reaffirmed the foundational principle that regard to the economic and commercial reality constitutes the basic criterion for the application of the common system of VAT (paragraph 31, citing Budimex, Case C-224/18 [2019], paragraph 27). The recognition of a given location as a fixed establishment cannot, therefore, depend exclusively on the legal status of the entity present there.
The Court acknowledged that a subsidiary may, in principle, constitute a fixed establishment of its parent company — invoking the precedent of DFDS, Case C-260/95 [1997], paragraphs 25–26. However, such a characterization depends upon the satisfaction of the substantive conditions laid down in Article 11 of Implementing Regulation No 282/2011, assessed in light of the economic and commercial reality, not merely the corporate relationship (paragraph 32). Those conditions require, as in every fixed establishment inquiry, a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable the fixed establishment to receive and use the services supplied to it for its own needs. The mere possession of a VAT identification number does not, of itself, suffice (Article 11(3)). What is required is genuine business substance — not the formal existence of a corporate vehicle.
Crucially, the Court confirmed that the reservation contained in the EU–Korea Free Trade Agreement, restricting the forms through which Korean investors may establish a presence in Poland, has no bearing on the interpretation of the fixed establishment concept (paragraph 30). The fact that a third-country company is compelled to operate through a subsidiary does not entail that it thereby maintains a fixed establishment. Necessity of form does not transmute into sufficiency of substance.
B. The Service Provider’s Duty of Inquiry: A Three-Step Analytical Framework — and Its Outer Limit
On the second question, the Court undertook a close reading of Article 22 of Implementing Regulation No 282/2011, which prescribes the criteria by which a service provider is to identify the fixed establishment of the service recipient. The provision establishes a three-step analytical sequence: first, an examination of the nature and use of the service supplied; second, where the first step proves inconclusive, an analysis of whether the contract, the order, and the VAT identification number assigned by the Member State of the service recipient and communicated to the service provider identify the fixed establishment as the place receiving the service and as the entity paying for it; and third, a default entitlement — where neither preceding step yields a determination — to treat the services as supplied to the place where the service recipient has established the seat of its economic activity (paragraph 35).
The Court’s decisive observation concerned the scope of the second step. Article 22(1), second subparagraph, refers to the contract for the supply of services between the service provider and the taxable person receiving the services — not to the contractual relations between that taxable person and an entity that might, depending on the circumstances, be regarded as its fixed establishment (paragraph 36). The distinction is analytically precise and practically consequential: the service provider’s duty of inquiry is bounded by the contractual relationship in which it participates, not the internal corporate arrangements of the group to which its counterparty belongs.
As Advocate General Kokott emphasized in her Opinion of 14 November 2019 (paragraphs 73–74), to require a service provider to investigate the contractual relations between a parent company and its subsidiary — information that is, as a general rule, inaccessible to the service provider — would effectively conscript a private commercial actor into performing functions that properly belong to the tax authorities (paragraph 37, citing Altic, Case C-329/18 [2019], paragraph 31).
C. The Operative Part of the Judgment
The dispositif is unambiguous:
“Article 44 of Directive 2006/112, as amended, and Article 11(1) and Article 22(1) of Implementing Regulation No 282/2011 must be interpreted as meaning that a service provider cannot infer the existence, in the territory of a Member State, of a fixed establishment of a company having its seat in a third country, from the mere fact that that company has a subsidiary in that Member State, and that that service provider is not required to examine, for the purposes of such an assessment, the contractual relations between those two entities.”
IV. Doctrinal Significance and Practical Implications
A. A Cautious but Consequential Holding
The Dong Yang judgment — read alongside Titanium (Case C-931/19, concerning the absence of a fixed establishment where immovable property is leased without the owner’s own personnel), Welmory (Case C-605/12, addressing the outsourcing of human resource infrastructure), and the foundational ARO Lease (Case C-190/95) — occupies a specific position within the progressive clarification of the fixed establishment concept.
Its central proposition is clear: the mere existence of a subsidiary does not, without more, establish a fixed establishment of the parent company. The Court expressly cautioned, however, that this rule is not absolute — a subsidiary may constitute a fixed establishment where the substantive conditions of Article 11 of the Implementing Regulation are satisfied, assessed against the economic and commercial reality rather than exclusively against the corporate form. What the judgment conspicuously declines to provide is any detailed guidance as to which factual circumstances — beyond corporate affiliation per se — would suffice to sustain such a characterization. This deliberate reticence is at once the judgment’s limitation and its invitation to further jurisprudential development.
B. The Protection of the Service Provider
Arguably the most consequential practical contribution of the judgment is its demarcation of the service provider’s duty of care. A service provider cannot be required to investigate the internal corporate arrangements between a parent company and its subsidiary — arrangements to which it has, as a matter of commercial reality, no access. The service provider examines the contract it has entered into with its counterparty, not the intra-group agreements of a multinational holding structure. This holding offers significant comfort to service providers operating in international supply chains, reinforcing legal certainty and ensuring that the burden of establishing the existence of a fixed establishment remains where it properly belongs: with the tax authorities.
This protection is not, it should be noted, without limits. Article 22 of the Implementing Regulation does impose an obligation of due diligence — the service provider must analyze the nature of the service, the terms of the contract, and the VAT identification data communicated to it. The boundary of diligence, however, is defined by the information available to the service provider in the ordinary course of commercial dealing, not by information embedded within the counterparty’s corporate group.
V. Conclusion
The Dong Yang judgment addresses a question of genuine practical difficulty: the VAT consequences of the ubiquitous parent–subsidiary relationship. Its answer — that corporate affiliation does not, ipso facto, establish a fixed establishment, and that the service provider bears no duty to investigate the internal contractual architecture of its counterparty’s group — provides two clear rules of engagement for cross-border transactions involving third-country entities.
What the judgment does not resolve is the affirmative case: the circumstances under which a subsidiary would satisfy the substantive conditions for characterization as a fixed establishment of its parent. The Court’s emphasis on economic and commercial reality over legal form suggests that the inquiry will turn on the degree to which the parent exercises operational control over the subsidiary’s human and technical resources, and the degree to which those resources are deployed for the parent’s own commercial purposes rather than the subsidiary’s independent activity. The doctrinal space between DFDS (where a subsidiary was found to constitute a fixed establishment) and Dong Yang (where it was not) remains fertile ground for future litigation.
For enterprises operating across EU borders — whether as parent companies structuring their operations through affiliated entities, or as service providers transacting with multinational groups — professional tax advisory in this domain should encompass not only the fixed establishment analysis under the VAT Directive but also a parallel assessment of permanent establishment risk under income tax instruments, a review of the adequacy of existing tax rulings in light of evolving CJEU jurisprudence, and a realistic appraisal of the enterprise’s exposure in the event of a tax audit.
Robert Nogacki – licensed legal counsel (radca prawny, WA-9026), Founder of Kancelaria Prawna Skarbiec.
There are lawyers who practice law. And there are those who deal with problems for which the law has no ready answer. For over twenty years, Kancelaria Skarbiec has worked at the intersection of tax law, corporate structures, and the deeply human reluctance to give the state more than the state is owed. We advise entrepreneurs from over a dozen countries – from those on the Forbes list to those whose bank account was just seized by the tax authority and who do not know what to do tomorrow morning.
One of the most frequently cited experts on tax law in Polish media – he writes for Rzeczpospolita, Dziennik Gazeta Prawna, and Parkiet not because it looks good on a résumé, but because certain things cannot be explained in a court filing and someone needs to say them out loud. Author of AI Decoding Satoshi Nakamoto: Artificial Intelligence on the Trail of Bitcoin’s Creator. Co-author of the award-winning book Bezpieczeństwo współczesnej firmy (Security of a Modern Company).
Kancelaria Skarbiec holds top positions in the tax law firm rankings of Dziennik Gazeta Prawna. Four-time winner of the European Medal, recipient of the title International Tax Planning Law Firm of the Year in Poland.
He specializes in tax disputes with fiscal authorities, international tax planning, crypto-asset regulation, and asset protection. Since 2006, he has led the WGI case – one of the longest-running criminal proceedings in the history of the Polish financial market – because there are things you do not leave half-done, even if they take two decades. He believes the law is too serious to be treated only seriously – and that the best legal advice is the kind that ensures the client never has to stand before a court.
