Brexit: VAT refund for British and Polish companies

Brexit will affect Polish taxpayer’s ability to claim a refund of British VAT on expenditures incurred within the territory of Great Britain (and so it will affect Polish VAT refunds for British entities). Up until now, based on the EU directive, taxpayers of all the Member States were entitled to claim a refund of the tax charged on purchased products and services within all the European Union using a uniform procedure. The procedure provides that a taxpayer submits an application for a refund of the foreign VAT in an electronic form to his appropriate tax office, which, after the initial verification, passes on the application to the tax administration of a relevant country. Within several months after submitting the request, the taxpayer receives the tax return onto his bank account.

After Great Britain’s leave, the VAT refund procedure for foreign entities remains under previously binding rules. However, it only does until the end of the transitional period. What it means is that the British VAT reclaims will only be possible on expenditures incurred until 31st December 2020. Furthermore, according to the agreement, the VAT refund applications must be submitted until 31st March 2021, which is a significant derogation from the generally binding deadline (usually, the applications are submitted until 30th September of a given year for a previous year). After the transitional period, reclaiming British VAT might not be as simple (if possible at all). First of all, what should be considered is that VAT refunds between the EU Member States and third countries (which Great Britain will become) are generally carried out based on reciprocity, i.e. if a given third country allows for claiming VAT refunds for entities from a particular Member State, then the Member State allows for claiming VAT refunds for taxpayers from the same third country. As can be seen, national authorities’ discretion applies in this case, and there is no general rule for third countries to use the same principle.

What appears likely is that Great Britain will continue to cooperate with the EU in terms of VAT returns and that Polish taxpayers will still be able to reclaim VAT charged on expenditures incurred in GB. It should, however, be assumed, that the procedure might not be as much taxpayer-friendly (current simplicity results from significant harmonisation of regulations within the EU). The general principle is to submit the applications directly to the tax administration of a third country, which implies a necessity of understanding the rules applicable in that country, using local forms and a language. The details depend on the kind of solution Great Britain will decide to adopt. Check our service Tax Advisory https://europe-tax.com/services/tax-advisory/

Brexit: Chain transactions and triangulation

It is worth remembering commercial transactions in which more than two entities are involved, e.g. additionally an intermediary. It is about the so-called chain transactions. At the end of the transitional period, both Polish and British taxpayers will be required to carry out additional registration formalities or corresponding changes to the chain transactions used.

Example

The German company sells goods to a company in the UK, which then resells them to a Polish entity, while the transport of the goods takes place directly from Germany to Poland. Such a transaction would generally require registration of a UK entity in Poland for VAT purposes. The transport ends in Poland, and that is where the transaction would be subject to VAT.

In such a situation, however, the regulations allow for simplification – the so-called triangulation. The condition that allows applying the simplification is the participation of three entities from the Member States. At the end of the transitional period, simplification will not apply as the condition of the involvement of three entities registered for VAT in three different Member States will not be met (if the UK company has no other VAT registration).

Example

In the situation described in the earlier example, the simplification is that an entity from the United Kingdom would not have to be registered for VAT in Poland, and any VAT settlement in Poland would be made by the final purchaser – the Polish company. At the end of the transitional period, if the UK company will not have another VAT registration, it will be obliged to register in Poland for VAT purposes (and to appoint a tax representative) and settle the ICA transaction from Germany, and then domestic sales to the Polish taxable person.

Similarly, there may be consequences for Polish traders involved in chain transactions to the UK (i.e. the need to register for VAT in the UK for import and further sales purposes).

In conclusion, companies trading with the UNITED KINGDOM, in particular within the supply chain, will have to analyze their transactions and redefine its consequences in VAT. In some cases, VAT registration in another country may be required, and thus include additional administrative costs. Read more about our Fiscal representative service https://europe-tax.com/services/fiscal-representative/

Fixed establishment by the European Court – Case C‑547/18 Dong Yang Electronics sp. z o.o.

On May 7th 2020 the Europen Court ruled in the case C 547/18 (Dong Yang Electronics Sp. z o.o. v Dyrektor Izby Administracji Skarbowej we Wrocławiu) that „the existence, in the territory of a Member State, of a fixed establishment of a company established in a non-Member State may not be inferred by a supplier of services from the mere fact that that company has a subsidiary there, and that supplier is not required to inquire, for the purposes of such an assessment, into contractual relationships between the two entities.”

In 2010 a company incorporated under Polish law, Dong Yang, signed a contract for the supply of services with a company incorporated under Korean law, LG Korea. Dong Yang was supposed to assemble printed circuit boards (PCB) from components and materials supplied by a subsidiary of LG Korea, LG Display Polska.  

Dong Yang did not charge VAT on the invoices for services provided to LG Korea as it has been informed by LG Korea that it did not have a fixed establishment in Poland i.e. it did not employ anyone nor had technical resources and immovable properties.

The Director of the Tax Administration Chamber, Wrocław decided that Dong Yang has supplied services in Poland as LG Poland constituted a fixed establishment of LG Korea and claimed from Dong Yang the amount of VAT for provided services. According to the Director of the Tax Administration Chamber, Dong Yang should have investigated contractual relationships between two companies and conclude that the beneficiary of services was in fact LG Poland.

    Dong Yang did not agree with that and the continuation of this case took place in court. The Regional Court decided that a clarification from the Court of Justice is required, and the request for a preliminary ruling was sent:

1.            “Can it be inferred, from the mere fact that a company established outside the European Union has a subsidiary in the territory of Poland, that a fixed establishment exists in Poland within the meaning of Article 44 of Directive 2006/112 … and Article 11(1) of Implementing Regulation No 282/2011 … ?

2.            If the first question is answered in the negative, is a third party required to examine contractual relationships between a company established outside the European Union and its subsidiary in order to determine whether the former company has a fixed establishment in Poland?”

The European Court has ruled as quoted above. This judgment is an important one for suppliers involved in providing services to foreign companies e.g. storage, labeling or logistics services. Tax authorities have been very keen to recognize in such situation a fixed establishment so this case may change this approach.

More details can be found in the ruling here.

Read more about our Tax Compliance Services https://europe-tax.com/services/tax-compliance-in-the-eu/