Contract manufacturing and tolling are how industrial production actually works – yet tax authorities increasingly treat them as a shortcut to claim a VAT fixed establishment, exposing multinational groups to disputes that can drag on for a decade.
In this episode, Paweł Mikuła is joined by Ine Lejeune, counsel before the Court of Justice in the Cabot Plastics case (C-232/22), to unpack one of the most important fixed establishment rulings in years. They work through the main rule of Article 44 and why fixed establishment is a strict exception rather than a default, the difference between purchase-side and sale-side fixed establishment, why an exclusive contract within the same group still isn’t enough to create one, and the „left hand serving right hand” point that resolves most tolling disputes. Along the way they connect the dots to Berlin Chemie, Adient and Titanium, the role of auxiliary activities, and the practical lessons – including looking to direct tax rulings – that help businesses stay out of these costly disputes in the first place.
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This article summarizes a podcast conversation with VAT litigator and academic Ine Lejeune and does not constitute legal advice or a sourced academic paper. The analysis reflects the conversation’s key insights rather than comprehensive research.
When Does a Contract Manufacturer Become a VAT Fixed Establishment? Lessons from Cabot Plastics
Introduction
This article summarizes a podcast conversation between Paweł Mikuła, partner and co-founder of „Halcyon | Tax. Customs. Legal.” and host of Vatvocate, and Ine Lejeune, attorney, researcher, and counsel before the Court of Justice of the European Union in the Cabot Plastics case (C-232/22). The discussion explores what the case decided, how the Court built its reasoning, why fixed establishment functions as a strict exception rather than a default, and what practical lessons the judgment offers to multinational groups that rely on contract manufacturing.
The Background: What Cabot Plastics Was About
The Tolling Arrangement
A tolling, or contract manufacturing, arrangement sits at the heart of the case. One company — the principal — contracts another company to manufacture products on its behalf. Here, Cabot Switzerland acted as the principal, and Cabot Plastics Belgium manufactured the goods under an exclusive contract that the two had run since 2012. The companies belonged to the same group, though only an indirect link connected them; Cabot Plastics Belgium was not a subsidiary of the Swiss principal.
Cabot Switzerland carried real weight in Switzerland. It employed 47 staff, occupied buildings, and its board of directors met and took strategic decisions there. Nobody disputed that the company genuinely operated from Switzerland.
The Belgian tax authorities nevertheless argued that the exclusive contract and the group relationship turned Cabot Plastics Belgium into a fixed establishment of Cabot Switzerland. If that argument had succeeded, the place of supply of the manufacturing services would have shifted. Under the main B2B rule, services follow the customer to where it has established its business — Switzerland. Treating the Belgian manufacturer as a fixed establishment would instead have dragged those services into the Belgian VAT net.
Two Problems, Not One
Ine Lejeune stressed that the case actually raised two separate fixed establishment questions, and only the first one catches the eye at first glance.
The purchase-side question asks whether the Swiss principal held a fixed establishment in Belgium capable of receiving the manufacturing services. The Belgian authorities answered yes and demanded Belgian output VAT on those services.
The sale-side question runs deeper and, in Lejeune’s view, posed the larger commercial risk. Cabot Switzerland sold the finished chemicals — carbonates that customers later turn into plastics — while the goods themselves sat in Belgium. The company shipped them from Belgium: sometimes within Belgium to other Belgian customers, sometimes to other member states, and sometimes outside the EU. For domestic Belgian sales, the reverse charge applied because a non-established supplier made the supply to a customer that either belonged in Belgium or worked through a Belgian VAT representative. A finding of fixed establishment would have knocked out that reverse charge. Cabot Switzerland would then have had to reissue every affected invoice, chase down customers years after the event, and hope those businesses still existed and still accepted corrected documents.
The timing sharpened the worry. The audit landed in 2017 and reached back over 2014, 2015, and 2016. Lejeune pointed to the Volkswagen case as authority that taxpayers can still correct invoices in such situations, but the practical headache remained enormous. Throughout the dispute the business carried on, and the client chose not to change its setup — continuing to apply the reverse charge and to leave the Swiss services free of Belgian VAT — betting on a win that would spare it a vast clean-up exercise.
The Court’s Reasoning
Starting with the Facts
The Court of Appeal referred three questions, but the Court of Justice read them as one and reframed the matter sharply: does an exclusive contract manufacturing arrangement, combined with the extra activities that surround it — packaging, storing raw materials, quality controls, and detailed reporting — turn the manufacturer into a fixed establishment of its principal?
Lejeune drew attention to a feature that she counts as a genuine lesson. The Court walked through every fact before it opened its legal analysis. It does not rule on the facts, but a precise factual record steers the answer. In paragraph 21 the Court recorded that the referring court had confirmed real substance in Switzerland — the 47 employees, the board, the strategic decisions. That confirmation matters: without substance in Switzerland, no one could even argue that Cabot Plastics Belgium invoiced a customer that genuinely sat there, which is exactly what Article 44 of the VAT Directive turns on.
The Direct Tax Signal
The Court also pointed to a direct tax ruling. Under Article 5 of the applicable double tax convention, the authorities had accepted — and kept repeating — that Cabot Switzerland held no permanent establishment in Belgium. Lejeune and her team had pressed this point in their written observations, and the Court picked it up. Paragraph 11 sets out the permanent establishment position; the very next paragraph notes that, despite this, the inspectors nevertheless found a VAT fixed establishment. Lejeune reads the Court’s framing as quiet surprise, and as an early hint that the judges would land on „no fixed establishment” once they applied the proper tests.
The Main Rule and a Strong Exception
From there the Court followed its classic structure. Article 44 supplies the main rule: for B2B services, the place of supply sits where the customer has established its business. The Court treats this rule as the rational, default solution that the legislature wrote into the law precisely to head off disputes about where tax falls. Fixed establishment operates only as an exception — and the Court effectively tells tax authorities to stop reaching for it whenever the main rule already answers the question.
Lejeune framed this even more strongly than a presumption. A fixed establishment finding does not start from neutral ground; it demands a full body of evidence to override the main rule. She observed that tax authorities often run the logic in reverse: they spot a non-established company with a contract inside the group, assume control passes to the principal, treat the manufacturer’s people and assets as the principal’s own, and arrive at a fixed establishment by default — brushing aside the legal structure and the contract along the way. That instinct, she noted, breeds costly disputes and ties up money that businesses could otherwise invest.
Control Over Resources
When the Court turned to application, it restated the definition of a fixed establishment: a suitable structure with permanent human and technical resources, not an occasional presence. Cabot Plastics Belgium clearly had people and equipment, and they stayed in place. But the Court asked the decisive further question. Before the Belgian manufacturer’s staff and assets can count as the Swiss entity’s own, someone must show that Cabot Switzerland decides who to hire and fire and can do so at short notice, and that it calls the shots on new buildings, new machinery, and repairs. In short, the principal must run the operation as if it had outsourced its own activity and kept full control of it. Only then does a fixed establishment appear. The Court built this analysis around paragraph 35 and anchored it in Berlin Chemie.
The Court then addressed exclusivity and group membership head-on. A single customer and an exclusive contract do not, on their own, create a fixed establishment. Nor does the occasional intervention that industrial production naturally involves — a quality audit, a flag that one employee lacked the right knowledge. Spotting a problem in the production line does not put the principal in control of the operation. Only immediate and permanent access to the resources, amounting to genuine full control, would do so. The Court made that point in paragraph 38.
Left Hand, Right Hand
The judgment then exposed a consequence that, in Lejeune’s experience, tax authorities tend to overlook. Suppose the argument had succeeded and Cabot Plastics Belgium had become a fixed establishment of the Swiss principal. The two would then form a single taxable person — and a single taxable person cannot supply services to itself, just as a head office and its branch cannot. The left hand cannot invoice the right. So even on the authorities’ own theory, no Belgian VAT could arise on the manufacturing services, because those services would never leave the single taxable person. Berlin Chemie had already made the same point.
Mikuła added that this argument had occurred to him even before Berlin Chemie, and that it largely settles the tolling question: the same people and the same assets would have to serve themselves. He noted, though, that it does not dispose of the sale-side problem, which turns on different facts.
Auxiliary Activities
Lejeune singled out paragraph 44 as a passage worth remembering. There the Court added that resources that serve only preparatory or auxiliary activities never create a fixed establishment. The point did not decide Cabot Plastics — the Belgian manufacturer plainly did what the business needed at its core — but it travels well to other settings. A company that runs an information hub or a representation office near the EU institutions, for instance, can draw on this paragraph when an authority questions its status. Lejeune suggested reading the commentary on the OECD model tax treaty for guidance on how far the idea stretches, since that commentary supplies its source.
Mikuła drew the wider principle: to claim a fixed establishment — even a sales one — a structure must be able to carry out the core of the business. A warehouse alone will not do; nor will a shared service center or some other supporting unit. The structure needs the capacity, and in his view some management capacity, to take decisions in the country. The auxiliary activities paragraph reinforces that coherent picture.
Related Cases
Lejeune and Mikuła pointed to several judgments that round out the field. Adient (2023) tackles the sales and marketing angle and found no fixed establishment in Romania for the German company. Titanium, despite its name, concerns an Austrian entity that lets out buildings and speaks to the sale side as well. Both reinforce the same theme: a contract that reads as if it bound independent parties does not, by itself, hand one party control over a structure in another country, and so does not create a fixed establishment.
The Outcome
Lejeune praised the judgment for its clarity. The Court applied the tests to the facts and left no opening for fresh argument when the case returned to the Court of Appeal in Liège, which duly confirmed that Cabot Switzerland held no fixed establishment in Belgium. That clarity ended the core dispute.
One issue stayed open. The authorities had withheld a large amount of VAT, so they now have to refund it with interest — and Belgian law, for the relevant period, also allowed interest on interest, a capitalization that represents real money. The Court of Appeal wanted a further hearing on how to read that provision after a 2023 change in the law. The parties have since reached agreement, including on the interest on interest, and the Court of Appeal in Liège still has to validate it.
The sale-side dispute follows a separate track. Because it concerns Cabot Switzerland — a non-established company whose competent VAT office sits in Brussels — a different court, the French-speaking court in Brussels, handles it. The team filed the claim there but asked the court to hold it in suspension until the fixed establishment question resolved. With the Liège judgment in hand, the team reactivated the Brussels proceedings over the VAT on the Belgian sales. A principle agreement points to no VAT and a refund with interest, though the matter still awaits its final step.
From the 2017 audit to the present, the case has run close to a decade. Lejeune credited her co-counsel, Gauthier Vael, a director and attorney at PwC Legal, for much of the success across those years.
Final Observations
The case offers practitioners several durable lessons. First, arguments live in unexpected places: a direct tax ruling on permanent establishment carried weight in a VAT dispute, so litigators should mine adjacent fields and put those findings in front of the Court. Second, the main rule governs and the exception must earn its place; an opinion on fixed establishment can fairly start from that hierarchy. Third, control decides the question — not exclusivity, not group membership, not the existence of a tight contract. Fourth, the single-taxable-person logic neutralizes most tolling claims on the purchase side, even before the control analysis bites.
For multinational groups that build their production around contract manufacturing — which is to say, most of them — Cabot Plastics offers reassurance and a template. It maps the facts, applies the tests, and shows where the line sits. The harder frontier now lies on the sale side, where e-invoicing and reporting obligations increasingly turn on whether a fixed establishment takes part in a supply, and where cases such as Adient and Titanium will keep shaping the answer.