On 24th of January 2019, the Court of Justice of the European Union (ECJ) delivered the judgement between Morgan Stanley & Co International plc and Ministre de l’Économie et des Finances concerning the rules applicable to pro rata calculation of value added tax (VAT) for the headquarters and fixed establishment in different Member States of European Union.
FACTS OF THE CASE IN BRIEF
Morgan Stanley & Co had a fixed establishment in France which was subject to VAT (in France).
Upon two inspections carried out by the tax authorities, it was found that that branch:
- On the one hand, carried out banking and financial transactions for its local clients, in respect of which it had opted to be liable to VAT, and,
- On the other, supplied services to the principal establishment located in the United Kingdom, in return for which it received transfers.
The branch deducted the whole of the VAT to which the expenditure attributable to those two categories of services was subject.
The tax authorities considered that the VAT charged in respect of the acquisition of the goods and services used solely for internal transactions with the principal establishment located in the United Kingdom was not deductible, since these transactions fell beyond the scope of application of VAT but nonetheless allowed, by way of mitigation, deduction of a fraction of the tax at issue by deducting a proportion applicable to that principal establishment, subject to the exceptions to the right of deduction applicable in France.
With regard to mixed expenditure, attributable to transactions carried out with both the principal establishment located in the United Kingdom and clients of the Paris branch, the tax authorities considered that they were only partially deductible and applied the deductible proportion applicable to that principal establishment, adjusted according to the Paris branch’s turnover giving rise to the right to deduct, subject to the exceptions to the right of deduction applicable in France.
The tax authority sent Morgan Stanley & Co International plc additional assessments to the VAT claimed. The Administrative Court in Montreuil (France) rejected Morgan Stanley’s applications for discharge from those assessments. The appeals lodged against the ruling of that court were, in turn, dismissed by the Administrative Court of Appeal in Versailles (France). The appeal against this judgment was brought to the Council of State (France).
QUESTIONS REFERRED TO THE ECJ
- In circumstances where expenditure of a branch established in one Member State is exclusively used for the transactions of its principal establishment established in another Member State, must the provisions of Article 17(2), (3) and (5) and Article 19(1) of the Sixth Directive, incorporated in Articles 168, 169 and 173 to 175 of Directive [2006/112], be interpreted to the effect that the Member State in which the branch is registered is to apply to that expenditure the branch’s deductible proportion, determined according to the transactions carried out in the Member State in which it is registered and according to the rules applicable in that State, OR to apply the proportion applicable to the principal establishment, OR to deduct a specific proportion combining the rules applicable in the Member States in which the branch and the principal establishment are registered, with regard in particular to a possible option mechanism for imposing VAT on transactions?
- What rules should be applied in the specific case where expenditure borne by the branch is used both for transactions in the Member State where it is registered and for transactions of the principal establishment, particularly as regards the concept of general costs and the proportion of tax deductible?
CONCULSIONS BY THE ECJ
The Court upheld that the Article 17(2), (3) and (5) and Article 19(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, and the Articles 168, 169 and 173 to 175 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that:
In relation to the expenditure borne by a branch registered in a Member State, which is used, exclusively, both for transactions subject to value added tax and for transactions exempt from that tax, carried out by the principal establishment of that branch established in another Member State, it is necessary to apply a deductible proportion resulting from a fraction the denominator of which is formed by the turnover, exclusive of value added tax, made up of those transactions alone and the numerator of which is formed by the taxed transactions in respect of which value added tax which would also be deductible if they had been carried out in the Member State in which that branch is registered, including where that right to deduct stems from the exercise of an option, effected by that branch, consisting in making the transactions carried out in that State subject to value added tax.
Moreover, the Court upheld that in order to determine the deductible proportion applicable to the general costs of a branch registered in a Member State, which are used for both transactions of that branch in that State and transactions of the principal establishment of that branch established in another Member State, account must be taken, in the denominator of the fraction which makes up that deductible proportion, of the transactions carried out by both that branch and that principal establishment, it being specified that it is necessary that, in the numerator of that fraction, besides the taxed transactions carried out by that branch, solely the taxed transactions carried out by that principal establishment must appear, in respect of which value added tax would also be deductible if they had been carried out in the State in which the branch concerned is registered.
The full details of this case can be viewed on this link: Case C‑165/17
For more information about this case or how FF International may assist you please contact:
Franco Falzon C.P.A., LL.M
(Managing Partner)
E: franco@ffinternational.com.mt
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