Real estate without personnel equipment is not a permanent establishment - ECJ-ruling "Titanium Ltd" (C-931/19)

In its judgement of 3 June 2021 (C-931/19) in the "Titanium Ltd" case, the ECJ (European Court of Justice) ruled that a rented property is not a permanent establishment for the application of the reverse charge procedure if the owner of the property does not have its own staff for the performance of services in connection with the rental. This contradicts the previous practice of the German tax authorities.

Facts of the case: Letting company without on-site staff

In the underlying case, a Jersey-based company had leased a property in Austria to two Austrian VAT taxable persons. The company did not maintain its own staff on site in Austria but rather contracted an Austrian property management company to settle rents and operating costs, to appoint service providers and suppliers, and to provide other services. Titanium Ltd retained decision-making power over the establishment and termination of tenancies as well as over their economic and legal conditions, over the implementation of investments and repair measures as well as their financing, over the selection of third parties to provide other services, and finally over the selection, commissioning, and supervision of the property management company itself.

The company assumed that it was not resident in Austria so that the reverse charge procedure applied to its VAT taxable rental services.

Austrian tax authorities: Own staff not required for permanent establishment

However, the tax office was of the opinion that the property in Austria was a permanent establishment for VAT purposes so that the company would have had to issue invoices with Austrian VAT. The fact that the company did not have its own staff on site was generally irrelevant in the case of domestic rental properties.

ECJ decides: No fixed establishment without personnel resources

In response to a request for a preliminary ruling from the Austrian Federal Fiscal Court, the ECJ referred to its established case law, according to which a permanent establishment requires a minimum number of staff and material resources formed by the constant interaction of the staff and material resources required for the provision of certain services. This requires a sufficient degree of permanence as well as a structure that, in terms of personnel and technical equipment, enables the autonomous provision of the services in question.

The ECJ uses the definition of "active permanent establishment" here. However, due to the openness of the question referenced, the ECJ expressly answers the question of the existence of a permanent establishment in the specific case also for the "passive permanent establishment", i.e., for both outgoing and incoming services of the rental company.

The ECJ also refers to Art. 11 of the Council Implementing Regulation, which defines certain terms for the application of the EU VAT Directive. According to this, a permanent establishment must have an appropriate structure "in terms of personnel and technical equipment".

As in the present case the Jersey company did not have its own staff in Austria capable of acting autonomously and had reserved all important decisions concerning the rental, there was no permanent establishment.

Tax administration must reconsider, and real estate companies may have to deregister

According to Section 13b.11 Subsec. 2 Sentence 2 of the administrative guidelines to the German VAT Code, the German tax authorities always treat non-resident taxable persons who own real estate located in Germany as resident in Germany for the purpose of determining the applicability of the reverse charge procedure. This has probably always been somewhat a simplification fiction that has generously disregarded EU law. In Germany, however, it has become common practice.

The Münster (ruling of September 5, 2013, 5-K-1768/10-U) and Cologne (ruling of March 14, 2017, 2 K 920/14) tax courts have also assumed that the criteria of personnel and technical equipment do not always have to be met to the same extent. Rather, a low level of staffing - or in exceptional cases even a lack of staffing - could be compensated for by above-average technical equipment. Thus, in the case of a wind power plant, the company's own personnel are not necessary for the assumption of a permanent establishment.

The advantage of this approach for the entrepreneurs concerned is that they can register for VAT in Germany and claim their input VAT through the normal VAT returns instead of the VAT refund procedure. After the ECJ ruling presented here, this is likely no longer justifiable. It remains to be seen how the tax authorities will react to this.

The tax authorities currently assume a further "permanent establishment fiction" beyond the reverse charge procedure: the effects of a VAT group are limited to internal services between the parts of the company located in Germany according to Section 2 Subsec. 2 No. 2 Sentence 2 of the German VAT Code. This also includes permanent establishments in Germany. Pursuant to Section 2.9 Subsec. 4 Sentence 2 of the administrative guidelines to the German VAT Code, real estate located and leased in Germany is to be treated as a permanent establishment. It is true that in the present case the ECJ has (only) ruled on the question of whether a leased property without personnel constitutes a permanent establishment for the reverse charge procedure. However, there is much to be said in favour of generalising the result reached by the ECJ so that the permanent establishment fiction is no longer tenable in tax group cases.

Furthermore, the question remains open as to what requirements are to be placed on the personnel resources. In the Titanium Ltd case, the rental company had reserved for itself all significant decisions in connection with the rental services. It therefore seems conceivable that external agents can also establish residency of the principal if, for example, they have far-reaching powers of attorney to conclude contracts.

(Status: June 25, 2021)