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

On 24 January 2019, the European Court of Justice gave its judgment in case C‑165/17 (Morgan Stanley & Co International plc), in which it answers the question if the pro rata of a head-office also applies to a branch (fixed establishment) of that head-office and the other way around.

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?

Judgment:

The ECJ rules as follows:

1. 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.

2. 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.

Source: Curia

The Opinion can be found HERE.

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