18 September 2013
Le Credit Lyonnais: CJEU judgment: Partial exemption: Foreign branch income
Luxembourg Tax Alert
On 12th September 2013, the Court of Justice of the European Union (CJEU) has delivered its judgment in the case of Le Crédit Lyonnais (C-388/11) on the extent to which the turnover-based pro-rata partial exemption calculation may include revenue generated by foreign branches.
Significantly, the CJEU judgment reflected the Advocate General’s opinion and ruled that in determining the deductible proportion of VAT, a company which is situated in a Member State may not take into account the turnover of its branches established in other Member States or outside the EU. Furthermore, in relation to special method calculations, a Member State may not authorise a company to take into account the turnover of a branch established in another Member State or in a third State.
Following a tax audit covering the period from 1 January 1988 to 31 December 1989, Le Crédit Lyonnais, headquartered in France, was assessed by the French tax authority on the basis that the company had included interest earned on loans granted by its headquarters to its branches abroad in the numerator and denominator of the deductible proportion of its input VAT.
Through subsequent appeals against the assessment, Le Crédit Lyonnais sought to argue that the income generated by branches from third parties must be its income and should be included, if the interest charged by the head office to those branches must be excluded, because they were part of the same entity.
The French Administrative Supreme Court submitted a reference for a preliminary ruling to the CJEU concerning the calculation of the VAT-deductible proportion of the bank and the computation of the pro-rata for a bank’s branches abroad in light of the interpretation of the neutrality principle.
On the question of whether the principal establishment of a company established in one Member State may take into account the revenue generated by each of its foreign branches in calculating its partial exemption recovery rate, the Advocate General answered in the negative.
The CJEU’s judgment reflects the Advocate General’s opinion, stating that in determining the deductible proportion of VAT applicable to it, a company, the principal establishment of which is situated in a Member State, may not take into account the turnover of its branches established in other Member States or non-EU countries. Furthermore, a Member State is not permitted to adopt a rule for the calculation of the deductible proportion per business sector of a company authorising that company to take into account the turnover of a branch established in another Member State or in a third State.
What is the impact for the Luxembourgish businesses?
Even if this decision relates to a bank, its impact is not limited to the banking sector. It could also concern businesses of other sectors (e.g., insurance, private equity, real estate, etc.) which have foreign branches.
It is thus extremely important that Luxembourgish businesses pay attention to this ruling and monitor its potential impact, taking into consideration the recent Circular 765 of 15 May 2013 regarding the VAT deduction methodology, see our tax alert of 15 May 2013 - VAT deduction right, and also to pay attention to any future potential guidance issued by the Luxembourg VAT Authorities in this respect. In particular, businesses should review the respective costs / revenue structures of the head office and its branch(es) in order to determine the most appropriate VAT deductible proportion.
EY has a global Indirect Tax practice which is experienced in providing support in relation to technical VAT issues. If you feel that the case could potentially have implications for your business, and you would like to discuss the position in more detail, please speak with an EY Indirect Tax contact.
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