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Tax Connect Flash | France | Right to deduct input tax in the relations between a head office and its branch


The Court of Justice will again rule on how to determine the right to deduct input VAT in the relations between a head office and a foreign branch.

The French Supreme Court (Conseil d'Etat) decided to stay the proceedings in a dispute between Morgan Stanley and the French tax authorities in order to submit the following questions to the Court of Justice of the European Union (CJEU) for a preliminary ruling:

"1. In the event that the expenses incurred by a branch established in one Member State are exclusively allocated to the transactions of its head office in another Member State, should Article 17 paragraphs 2, 3 and 5, and Article 19 paragraph 1 of the Sixth Directive 77/388/EEC, reproduced in Articles 168, 169 and 173 to 175 of Directive 2006/112/EC be interpreted as meaning that they imply that the Member State of the branch applies to these expenses the branch's prorata determined by the transactions it carries out in its State of establishment and by the rules applicable in that State, or the proportion of the head office, or a specific deductible proportion combining the rules applicable in the Member States where the branch and head office are established particularly with regard to the possible existence of an option scheme for subjecting transactions to value added tax?

2. What rules should be applied in the particular case where the expenses incurred by the branch contribute to the performance of its transactions in its State where it is established and to that of the transactions of the head office, particularly with regard to the notion of general costs and prorata?" (free translation of the questions referred to the ECJ).

In this case, in which CMS BFL assists Morgan Stanley, the Conseil d'Etat thus invites the Court of Justice to clarify its case-law (in particular, the link between "Le Crédit Lyonnais" ruling in Case C-388/11 and the ESET order, Case C-393/15) on the procedures for determining the deductible input tax amount of a single taxable person consisting of a head office and one or more establishments having no autonomy in respect of the expenses borne by one or the other and which may contribute to the transactions carried out either by the part of the entity which bears the expenses, or that established abroad, or all of the transactions carried out by the taxable person.

Since the bank Morgan Stanley has opted in France for VAT on its banking and financial transactions, the Court of Justice will also probably have to rule on the territorial scope of this option for the purpose of determining the right to deduct.

The proceedings before the Court of Justice will probably take between 18 and 24 months.

Conseil d’Etat, no. 389105 of 29 March 2017, Morgan Stanley & Co international PLC