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Tax Connect Flash | France: calculation of VAT pro-rata referred to the European Court of Justice

Following a case started by Le Credit Lyonnais, one of the longstanding clients of CMS Bureau Francis Lefebvre and other CMS offices, the Conseil d’Etat, the supreme administrative jurisdiction in France has referred certain questions related to calculation of the pro-rata for companies with worldwide operations to the European Court of Justice (“ECJ”).


Le Credit Lyonnais, a major bank based in France, conducted significant activities outside France through its branch offices based in the European Union (EU) and third countries. At the outset of the case, the French authorities challenged the VAT declarations submitted by Le Credit Lyonnais, refusing to take into account for the calculation of the VAT deduction pro-rata, interest earned on loans granted by the French head office to its foreign branches, on the basis that they belong to the same legal entity. Following the logic of the French authorities, Le Credit Lyonnais then changed tactics and claimed that whatever transactions its foreign branches realise with third parties should then be taken into account for the calculation of its pro-rata in France. Since its non-EU branch offices were mainly catering for third country clients, taking into account the worldwide operations could significantly improve the pro-rata of Le Credit Lyonnais in France.

Questions referred to the European Court of Justice

The following questions were referred to the ECJ for a preliminary ruling:

  • When the right to deduction is determined by application of a pro-rata, the territoriality rules of the Community VAT legislation require that the head office of a taxpayer shall take into account the turnover generated by all of its branch offices located in other Member States, and similarly each branch office shall take into account the totality of the turnover generated by the taxpayer?
  • Whether the same solution applies to branch offices established outside the European Union, especially in light of the right to deduction related to financial operations where the recipient of the service is established outside the Community?
  • Is it possible that the response varies from one Member State to the other, according to the method adopted concerning the calculation of the pro-rata, especially as regards the creation of distinct sectors of business?
  • Is it possible to limit the application of a global pro-rata to the costs suffered by the head office for the benefit of the foreign branch offices?
  • Shall turnover reached in another country be taken into account according to the rules applicable in the country of the branch office or that of the head office?

The responses to these questions are expected to have a significant effect on the operation of companies with significant cross-border operations through branch-offices, especially banks whose third country operations may significantly improve their deduction rights.


Elisabeth Ashworth
Elisabeth Ashworth
Picture of Corinne Reinbold
Corinne Reinbold