In a decision dated December 4, 2025 (V R 37/23), the German Federal Fiscal Court (BFH) clarified a crucial question in cross-border VAT law: When a German fixed establishment orders services that are ultimately used by a foreign head office, where is the place of supply for VAT purposes?

The court ruled that if the German establishment does not use the service for its own business purposes, the service is not taxable in Germany, even if the German branch placed the order and received the invoice. Instead, the place of supply is where the head office is located.

This decision has significant implications for international businesses operating in Germany, especially those with representative offices or fixed establishments that support global operations. Below, we answer the most important questions arising from this ruling and explain what it means for your tax compliance, ERP systems, and risk management.

What Was the Case About?

A non-EU hotel group operated a liaison office in Germany. This office ordered advertising services in Germany to promote the group’s resorts abroad. The German tax authorities denied the input VAT deduction, arguing that the services were not taxable in Germany. The BFH confirmed this view: the services were not used by the German office but by the head office abroad. Therefore, the place of supply was not Germany.

What Is the Key Takeaway From the Ruling?

The BFH confirmed that the place of supply for B2B services follows the actual use of the service. If a German fixed establishment orders a service but it is used exclusively by the foreign head office, then the service is not taxable in Germany. This applies even if the German branch is the contractual party or receives the invoice.

What Is the Legal Basis for This Decision?

The ruling is based on:

• § 3a para. 2 of the German VAT Act (UStG)
• Article 44 of the EU VAT Directive (2006/112/EC)
• Articles 21 and 22 of the VAT Implementing Regulation (EU 282/2011)

These provisions establish that the place of supply is the location of the recipient’s business, unless a fixed establishment is the actual recipient and uses the service for its own needs.

How Do You Determine Whether a Service Is Allocated to the Fixed Establishment or the Head Office?

Key criteria include:

• Economic Use: Who benefits from the service?
• Outputs: Does the fixed establishment generate its own taxable outputs related to the service?
• Contractual Documentation: Who is the contractual party?
• VAT ID Used: Which VAT number was provided to the supplier?
• Payment Flow: Who pays for the service?
• Operational Capacity: Does the fixed establishment have the resources to use the service?

What Are the Practical Challenges for Service Providers?

Service providers often lack visibility into how a service will be used. If they incorrectly charge German VAT on a service that is not taxable in Germany, the recipient cannot deduct the VAT. This creates a compliance risk for both parties. Providers should carefully assess the contractual documents, VAT IDs, and payment details. When in doubt, rely on the head office as the default recipient, as permitted by Article 22 of the VAT Implementing Regulation.

What Does This Mean for ERP Systems and Tax Determination Logic?

Companies should:

• Maintain separate vendor/customer records for head office and fixed establishment entities.
• Implement tax determination rules that consider the actual use of services.
• Train staff to recognize when services are for the head office.
• Document the rationale for VAT treatment in the ERP system.
• Use purchase order types or cost centers to flag services used by the head office.

Does the Ruling Resolve All Uncertainties?

Not entirely. While it clarifies that economic use determines the place of supply, it leaves open questions, such as whether a fixed establishment must have its own outputs to be considered a recipient. Also, in practice, mixed-use services or unclear documentation can still lead to disputes. Companies must remain vigilant and ensure robust internal processes.

You Once Described the Fixed Establishment as a “Golden Goose” in a 2017 Article. How Does This Ruling Change That View?

In 2017, I likened the fixed establishment to a “golden goose” that companies stick to for VAT purposes, once you had one, you were “glued” to local VAT obligations. This ruling shows that the goose does not always stick. A fixed establishment only triggers VAT consequences when it actually uses the service. That is a welcome shift toward aligning VAT treatment with economic reality and reducing unnecessary compliance burdens.