Permanent establishment for VAT. What’s in a name?
By ‘permanent establishment’ we usually mean the concept that applies to income taxes and is found, inter alia, in the double tax treaties. However, a different definition applies to VAT. But this definition has changed over the years. We will list the differences between the old and the most recent definition for you.
For the application of VAT, it makes a big difference whether a company is established in Belgium or not. If you have a permanent establishment in Belgium, you are established in Belgium. Hence the importance of knowing what a “permanent establishment” means for VAT purposes.
The scheme applicable to taxable persons not established in Belgium is set out in detail in Circular No 4/2003 of 04.03.2003. At that time, the administration assumed that a taxpayer had a permanent establishment in Belgium when the following three conditions were met cumulatively :
- the taxable person has a place of management, a branch, a factory, a workshop, an agency, a warehouse, an office, a laboratory, a buying or selling office, a storage facility or any other permanent establishment in Belgium, with the exception of construction sites [The construction sites shall not be regarded as permanent establishments regardless of the duration of the works];
- the establishment referred to in (1) is managed by a person competent to bind the taxable person to suppliers and clients;
- the establishment referred to in (1) regularly carries out transactions referred to in the VAT Code: supplies of goods or services [The transactions may take place without distinction abroad or in Belgium and are effectively subject to tax or exempt].
More recent definition
Under the influence of European case law, people have moved away from that old definition and today we find the following three conditions for the existence of a permanent establishment in the official VAT manual:
- the taxable person has a place of management, a branch, a factory, a workshop, an agency, a warehouse, an office, a laboratory, a buying or selling office, a depot or any other permanent establishment in Belgium, with the exception of construction sites (regardless of the duration of the works);
- that establishment is characterised by a sufficient degree of permanence and a modified structure in terms of human and technical resources; the tax authorities presume that this is the case when that establishment is managed by a person competent to bind the taxable person to suppliers and clients; in the opposite case, it is the responsibility of the foreign taxable person to demonstrate that this condition is met;
- the human and technical resources referred to in point 2) allow that establishment to supply goods or services, in a regular manner and within the meaning of the Code, wherever that activity takes place and without distinction as to whether these transactions are indeed subject to tax or exempt.
Why is that distinction important?
For the application of the VAT Code, a taxable person whose place of economic activity or domicile or habitual residence is not established in Belgium, is considered to be a taxable person not established in Belgium. For most of the transactions he carries out in Belgium, he will be able to invoice without charging VAT under the reverse charge mechanism, amongst others if the VAT taxable recipient is established in Belgium. In case the VAT payer not established in Belgium is liable for paying the Belgian VAT, he will have to register for VAT at the ‘Team Foreigners VAT Authority’ (the former Central VAT Office for Foreign Tax Payers).
The foreign taxable person with a permanent establishment in Belgium is in the same position with regard to Belgian VAT for the transactions carried out by this permanent establishment as the taxable person whose domicile or corporate or statutory seat is established in Belgium. He has the same rights and is subject to the same obligations. In most cases, therefore, he will have to charge VAT on his outgoing transactions and, for this purpose, he must register with the ‘Team Foreigners VAT Authority’ in Brussels.
Case law also follows the abovementioned definition. In fact, the Court of Appeal in Ghent recently confirmed that a Dutch transport company had a Belgian permanent establishment. This was because the facts showed that, at its location in Lochristi (Belgium), it consistently had staff and technical resources at its disposal for carrying out transport operations. This company should therefore have charged Belgian VAT to its Belgian clients instead of making use of the reverse charge rule under Article 196 of the VAT Directive 2006/112/EG.
Moreover, recent case law has ruled that a subsidiary cannot qualify as a permanent establishment. This follows, inter alia, from the fact that a parent company and a subsidiary are two separate taxable persons, unless they form a VAT group.
Belgian recipients must also be vigilant when trading with foreign companies. If the latter are not actually established in Belgium, they will often, correctly, invoice to the Belgian recipient without charging VAT under the reverse charge mechanism. The Belgian recipient can then confidently deduct this VAT in his VAT return.
If, on the other hand, the ‘foreign company’ has a Belgian permanent establishment and the latter carries out the transaction, the aforementioned reverse charge rule will no longer apply. Strictly speaking, therefore, the ‘reverse charge VAT’ is not deductible for the Belgian recipient.
Van Havermaet is market leader in assisting foreign companies that may or may not be temporarily active on Belgian territory. It goes without saying that we do not lose sight of the VAT interests of both the foreign entrepreneurs and their Belgian customers. Our VAT advisors provide advice and assistance to both.
Publication date: 8 July 2020