Rental premises and fixed establishments

The CJEU has held, in a short judgment, that premises which are rented out cannot, without more, amount to a fixed establishment of the person letting those premises: Titanium Ltd v Finanzamt Österreich (Case C-931/19). The Court reiterated that it was necessary for a fixed establishment to exist for there to be the necessary human and technical resources present. That was not the case with a property which was simply rented out by the owner without further involvement.

The place of supply of rental property will, in either case, be where the property is situated (under Article 47 of the Principal VAT Directive), however the decision is important in determining whether the property owner is required to account for the VAT payable or the tenant should account for the VAT under the reverse charge.

Background

Titanium is Jersey company which is engaged in property management, asset management and the management of housing and accommodation. Titanium let a property which it owned in Austria to Austrian businesses. This was Titanium’s only activities in Austria. In order to carry out this activity, it appointed an Austrian real estate management company to act for it, including invoicing rental payments, maintaining records and preparing VAT declaration data. Those services were carried out by the agent in premises which were not the property of Titanium.

Titanium retained the decision-making power to enter into and terminate leases, to determine the conditions of the tenancy agreements, to make investments and repairs and to organise their financing, to choose other service providers and to select, appoint and oversee the real estate management company itself.

Titanium took the view that it was not liable to pay VAT in respect of its activity of letting the property on the basis that it did not have a fixed establishment in Austria. However, the Austrian tax authority argued that a property which was rented out constituted such a fixed establishment and, consequently, sought to collect VAT on the rental payments.

The CJEU has previously held that the concept of ‘fixed establishment’ implies a minimum degree of stability derived from the permanent presence of both the human and technical resources necessary for the provision of the services. It thus requires a sufficient degree of permanence and a structure adequate, in terms of human and technical resources, to supply the services in question on an independent basis (for example Planzer Luxembourg (Case C 73/06). When the dispute reached the Austrian court, the court was unsure regarding the concept of ‘fixed establishment’ in respect of an activity which, as here, does not actually make use of any technical and human resources for its performance and referred the matter to the CJEU in the following terms:

'Is the concept of “fixed establishment” to be interpreted as meaning that the existence of human and technical resources is always necessary and therefore that the service provider’s own staff must be present at the establishment, or can – in the specific case of the letting, subject to tax, of a property situated in national territory, which constitutes only a passive tolerance of an act or situation whereby the supplier authorises a third party to do something that the latter could not do without such authorisation – that property, even without human resources, be regarded as a “fixed establishment”?’

Decision of the CJEU

The CJEU reiterated that the concept of ‘fixed establishment’ normally requires a sufficient degree of permanence and a sufficient structure in terms of human and technical resources. In particular, referring to the decision in ARO Lease (Case C-190/95) the Court stated that a structure without its own staff cannot fall within the scope of the concept of a fixed establishment.

Moreover, this interpretation was supported by Article 11 of Implementing Regulation No 282/2011, which provides that a fixed establishment is characterised by a suitable structure ‘in terms of human and technical resources’.

In this case, it was clear that Titanium had no human resources in Austria, other than the third party services it contracted. These are, of course, insufficient to amount to a fixed establishment where they are simply providing services to their client, rather than carrying on the business of the client.

The Court concluded that a property which does not have any human resource enabling it to act independently clearly does not satisfy the criteria established by the case-law to be characterised as a fixed establishment within the meaning of the VAT Directives. Accordingly, the Court answered the question referred by confirming that a property which is let in a Member State in the circumstance where the owner of that property does not have his or her own staff to perform services relating to the letting does not constitute a fixed establishment within the meaning of Article 43 to 45 of the Principal VAT Directive 2006.

Comment

The decision is consistent with HMRC’s published guidance on the meaning of fixed establishment in this context. In particular, section 3 of Notice 741A advises that in the context of “a company with a business establishment overseas that owns a property in the UK which it leases to tenants - the property does not in itself create a fixed establishment, but, if the company has UK offices and staff or appoints a UK agent or representative (such as a subsidiary company acting on their instructions) to carry on its business, this creates a fixed establishment in the UK”.

It should be noted, however, that where an overseas entity completely delegates the carrying on of the rental activities to a local agent or subsidiary, then although the rental property itself will not be a fixed establishment of the overseas entity, the local agent or subsidiary may, in those circumstances, amount to a local fixed establishment for the purposes of determining the place of supply and responsibility for accounting for the VAT chargeable.