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ECJ Case C‑165/17 (Morgan Stanley) – Opinion – Deduction of input VAT by fixed establishment and application of pro rata

On 3 October 2018, Advocate General MENGOZZI gave his (long) opinion in case C-165/17 (Morgan Stanley & Co International plc) regarding the deduction of input VAT by a fixed establishment and the application of the pro rata.

(Unofficial translation)

Facts (simplified):

  • Morgan Stanley & Co international plc (Morgan Stanley) was involved in the banking and financial business (in the United Kingdom as well as in France). Morgan Stanley is established in the United Kingdom, with a branch (fixed establishment) in France.
  • In France, the fixed establishment made supplies to (local) third parties as well as provided services to the headquarters in the United Kingdom. It charged French VAT on its domestic transactions and it applied the reverse charge on the payments it received from the UK headquarters.
  • The fixed establishment deducted all of the input VAT it incurred, i.e. on the costs related to the supplies to third parties as well as on the transactions to the headquarters.
  • The French tax authorities argued that the input VAT incurred on the costs that were related to the transactions to the headquarters could not be deducted. But they did allow the fixed establishment to apply a pro rata calculation.
  • Morgan Stanley did not agree with this and the case was brought before the French court, which in turn asked the following questions to the ECJ (summarized):
    • If a fixed establishment is providing services to its headquarters, is than the pro rata of this headquarters applicable to the input VAT deduction of the fixed establishment in the other EU Member State?


According to the AG, it was a fact that the French branch was a fixed establishment for VAT purposes, but not a separate taxable person. Therefore, the UK headquarters and the fixed establishment had to be regarded as one taxable person.

Furthermore, the AG pointed out that the questions at issue only related to the input VAT charged on costs used for the supplies by the UK headquarters and on costs used for both the supplies by the fixed establishment in France and by the UK headquarters (the general costs).

The AG is of the opinion that:

(1) Where, in circumstances such as that in the main proceedings, expenditure of a branch established in one Member State is exclusively used for the transactions of its headquarters established in another Member State, the VAT Directive must be interpreted to the effect that the Member State in which the branch is registered has to apply to that expenditure the branch’s pro rata, taking into account the transactions carried out by the headquarters to third parties, on the basis of the rules applicable in the Member State in which the branch and in which the headquarters are registered.

(2) Where expenditure borne by the branch is used both for transactions in the Member State where it is registered and for transactions of the headquarters registered in another Member State, the pro rata must be determined according to the same rules and procedures applicable to the expenses borne by such branch and exclusively used for the transactions of its headquarters.

Source: Curia