In Morgan Stanley & Co International v Ministre de l’Économie et des Finances (Case C-165/17) (24 January 2019), the CJEU found that a French branch should take into account the activities of its UK principal establishment when calculating its VAT recovery rate.
Morgan Stanley, a company established in the UK, had a branch in Paris, which, as a fixed establishment, was subject to French VAT. The branch carried out banking and financial transactions for its local clients, in respect of which it had opted to be liable to VAT, and supplied services to its UK principal establishment. The issue was whether it was entitled to deduct input tax in relation to both categories of services.
The CJEU observed that in the absence of any legal relationship between a branch and its principal establishment, which together form a single taxable person, reciprocal performance between those entities constitutes non-taxable internal flows of funds, unlike taxed transactions carried out with third parties. The CJEU therefore considered that a branch registered in a member state is entitled to deduct, in that state, input tax incurred on goods and services which have a direct and immediate link with taxable supplies, including those of its principal establishment established in another member state, on condition that those transactions would also give rise to deduction if they had been carried out in the state in which that branch is registered.
The CJEU added that a pro rata system applies where a branch registered in a member state incurs expenditure for the purposes of both of taxable transactions and exempt transactions carried out by its principal establishment established in another member state.
Why it matters: The CJEU’s decision suggests two different calculations of the VAT recovery rate of a branch located in a different member state from the principal establishment, as the method will differ depending on whether the costs are exclusively for supporting the principal establishment, or for the benefit of both the branch and the principal establishment. This decision may therefore not only reduce the VAT recovery rate of international branches, it may also create significant administrative burdens for partly exempt businesses operating through international branches.
In Morgan Stanley & Co International v Ministre de l’Économie et des Finances (Case C-165/17) (24 January 2019), the CJEU found that a French branch should take into account the activities of its UK principal establishment when calculating its VAT recovery rate.
Morgan Stanley, a company established in the UK, had a branch in Paris, which, as a fixed establishment, was subject to French VAT. The branch carried out banking and financial transactions for its local clients, in respect of which it had opted to be liable to VAT, and supplied services to its UK principal establishment. The issue was whether it was entitled to deduct input tax in relation to both categories of services.
The CJEU observed that in the absence of any legal relationship between a branch and its principal establishment, which together form a single taxable person, reciprocal performance between those entities constitutes non-taxable internal flows of funds, unlike taxed transactions carried out with third parties. The CJEU therefore considered that a branch registered in a member state is entitled to deduct, in that state, input tax incurred on goods and services which have a direct and immediate link with taxable supplies, including those of its principal establishment established in another member state, on condition that those transactions would also give rise to deduction if they had been carried out in the state in which that branch is registered.
The CJEU added that a pro rata system applies where a branch registered in a member state incurs expenditure for the purposes of both of taxable transactions and exempt transactions carried out by its principal establishment established in another member state.
Why it matters: The CJEU’s decision suggests two different calculations of the VAT recovery rate of a branch located in a different member state from the principal establishment, as the method will differ depending on whether the costs are exclusively for supporting the principal establishment, or for the benefit of both the branch and the principal establishment. This decision may therefore not only reduce the VAT recovery rate of international branches, it may also create significant administrative burdens for partly exempt businesses operating through international branches.
