EU: place of establishment of a business

The European VAT rules apply a global concept that isn’t linked to nationality or place of establishment. A foot painter in Mexico is a VAT taxable person (business), as well as a department store in London, or an American company established in Beijing selling cars in Nova Zembla. The question of “where a supply is made” is more relevant than where the “taxable person” must be taxed.

However, the place of establishment is a relevant factor in determining the place of supply of services or goods. Within the EU, for example in a case where a German tax advisor is providing tax advice to a private individual living in Italy, such general business-to-consumer (B2C) service is taxable where the business (Germany) is established. In a case of the supply of goods in The Netherlands by an Italian business to a Dutch established business, the VAT due is levied from the Dutch business. by way of the reverse charge.

The VAT directive doesn’t contain a general provision for the place of establishment. Apparently, in practice, this wasn’t a great issue, as the first case to come to the European Court of Justice (CJEU) was Planzer[1] in 2007. The determining factors used by the CJEU are similar but not all identical to those of Article 10 VAT regulation[2] (VR) which only apply for the main rules of supply of services, laid down in Article 44 (B2B-services) and 45 (B2C-services) VAT Directive[3]. 

From these factors it was determined that the place of establishment shall be the place where the central administration functions of the business are carried out. To determine this, account shall be taken of the place where essential decisions concerning the general business are taken, the place where the registered office located, and the place where management meets. While the scope is limited to the above-mentioned services, they can be used as a guideline in other situations (e.g. Article 38 and 58 VAT Directive[4]).

In my view, the arguments and factors mentioned in Planzer are still relevant, even though they dealt with the interpretation of the so-called “8th Directive”[5]. In addition to the Article 10 VR rules, other elements mentioned in Planzer that must be taken into account include: the place of residence of the directors, the place where general meetings are held, the place where administrative and accounting documents are kept, and where financial (particularly banking) transactions mainly take place.

Being established in the Netherlands

In the Netherlands, we deal on a regular basis with the tax authorities on this subject, especially when a foreign company wishes to set up in the Netherlands for trading purposes as a kind of conduit company, interposed between a foreign-group company and the EU marketplace. 

Such a company lacks real substance, i.e. no staff, no real office, no telephone line, no Dutch IT set up – one would call it an empty shell. The business is totally run from abroad, with only some formal functions being fulfilled in the Netherlands, such as meetings of the board of directors once or twice a year, and an annual general meeting to sign financial statements and other board meeting reports. Also, any banking activity is executed from abroad, even if a Dutch bank account is used (although it is rather difficult to obtain such bank account under said circumstances).

The solution to being considered an unestablished shell company is to appoint a professional Dutch director living in the Netherlands who handles all the above functions, monitors all trade, signs all documents, and manages the day-to-day issues linked with the activities of the business. Normally, such services are rendered by professional service companies, referred to in the Netherlands as trust companies. Such companies fall under regulatory rules of the Dutch Central Bank and the Authority Financial Markets. 

Often, these companies also provide domiciliation, and accounting services. However, the costs of such a director are relatively high and sometimes prohibitive to set up. A Dutch company under trust supervision, and including legal/tax compliance, will cost at least EUR 15,000 a year, even for very limited activities such as those of a straightforward holding company. When dealing with an operational trading company with lots of transactions, the costs will rapidly increase.

In cases where the volume of transactions represents a certain or even substantial value, I advise the use of a professional director (including secretarial services) as that is essential to ensure the business is properly functioning for trade and tax purposes. When set up and managed in an efficient and cost-effective way, the profits will certainly exceed the expense.

[1] CJEU 28 June 2007s, Case C-73/06 (Planzer).

[2] Council Implementing Regulation (EU) No 282/20112 of 15 March 2011.

[3] Directive 2006/112/EU.

[4] Article 38 deals with the supply of gas, electricity, heat, and cooling; Article 58 deals with telecom, broadcasting, and electronic services.

[5] Eighth Council Directive 79/1072/EEC of 6 December 1979.

Toon Hasselman is an experienced (30 years) high level VAT and customs specialist to both national and international companies. He provides simple and practical solutions, quick “outside the box” alternatives if necessary, and promotes a no-nonsense approach with conclusive solutions at a fair cost. Toon is also the Global Vice Chair of the GGI Indirect Taxes Practice Group.