CJEU : turnover of foreign branches not to be included in the calculation of VAT pro rata

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Crédit Lyonnais case – The CJEU rules that the turnover of the branches established abroad is not to be included in the calculation of the deductible proportion applicable to the headquarters (12/09/2013, C-388/11).

The EU VAT Directive does not contain any rules with regard to the way revenue generated by foreign branches has to be considered for the purpose of the deduction of the VAT by the head office.

Further to a dispute with the French VAT authorities, the French bank Le Crédit Lyonnais (LCL) claimed that, in order to determine the deductible proportion of its principal establishment, the income of its foreign branches should be taken into account, since according to the FCE case (CJEU, 23 March 2006, C-210/04) a company’s main office and its branches constitute one taxable person with the consequence that the transactions between these entities are regarded as internal transactions.
The French Conseil d’Etat referred different questions to the CJEU aiming to ascertain how the deductible proportion of VAT of the principal establishment of a company situated in a Member State and of it branches should be determined.

In his conclusions, the Advocate General had considered that the Member States cannot be required to provide that account must be taken of the turnover of the company’s branches established abroad.

The Court goes further in considering that a company may not take into account the turnover of its branches established abroad. Moreover, a Member State may not adopt a rule for the calculation of the deductible proportion per sector of business which authorizes a company to take int account the turnover of a branch established abroad. In this respect the Court makes no distinction between EU and non-EU branches.

This decision is in line with previous case-law following which :

  • The determination of method of calculation of the deductible proportion falls within the scope of the national VAT legislation (C-488/07, Royal Bank of Scotland)
  • The method of repayment of the VAT depends solely on the place where the taxable person is established (C-244/08, Commission v. Italy)

The findings of the Court seem to call into question the Belgian provisions. It results from the article 13, 3°, RD n°3 that (theoretically) the turnover of the operations realized by a foreign establishment is included in the calculation of the VAT prorata of the headquarters situated in Belgium, except if the costs relating to these operations are not directly borne by the said headquarters. Further to the LCL case, this provision should in principle be adapted.

This CJEU decision also underlines that the structure chosen by a company (subsidiary, branch, no establishment) to supply services to foreign clients may entail different consequences from a VAT viewpoint which should not be underestimated, particularly in the financial sector where the economic players often incur important VAT costs.

Should you have any queries concerning the above, do not hesitate to contact Yves Bernaerts, Bart Buelens or Jean-François Denis, or your usual contact within EY.