FRANCE - CJEU decision on the deductible proportion of VAT on mixed-use goods and services
On 24 January 2019, the Court of Justice of the European Union (CJEU) handed down its decision in C-165/17 in a case between Morgan Stanley, a British company, and the French Tax Authorities.
In this case, the French branch of a UK headquartered company (Morgan Stanley) carried out banking and financial transactions for its local clients, in respect of which it had opted to be liable to VAT. It also supplied services to the UK headquarters of the company, in return for which it received transfers. The branch deducted the whole of the VAT incurred on the expenditure attributable to those two categories of services. The French Tax authorities questioned this full deduction of VAT.
The CJEU recognised the deduction of VAT charged on expenditures in France and allocated them to the different services. In allocating the expenditures, the CJEU analysed the nature of the services in both Member States and considered the nature of the services (both taxable services, which give rise to the right to deduct VAT, and exempt services, which do not give rise to the right to deduct VAT).
The CJEU concluded the following:
- VAT affecting expenses incurred for the VAT exempted activities of the UK headquarters of the company does not give rise to the right to deduct VAT;
- VAT is deductible on expenses incurred by the French branch for taxable activities in the UK and which would be taxable in France;
- VAT affecting expenses borne by the French branch, which is used, exclusively, both: (i) for transactions subject to VAT, and (ii) for transactions exempt from VAT, carried out by the UK headquarters of the company, is deductible according to a fraction as follows:
- The denominator is the turnover, exclusive of VAT, made up of those transactions alone, and
- The numerators is the taxed transactions in respect of which VAT would also be deductible if they had been carried out in France, even if the right to deduct stems from the exercise of an option for VAT taxation in France.
- VAT affecting general costs incurred by the French branch, which are used for both transactions of the branch in France and transactions of the UK headquarter company, is deductible according to the “European consolidated adjusted pro rata”, which is based on the following:
- The denominator is the transactions carried out by both the French branch and the UK headquarter company and;
- The numerator is taxed transactions carried out by the French branch and solely the taxed transactions carried out by the UK headquarter company, in respect of which VAT would also be deductible if they had been carried out in France.
The CJEU’s Morgan Stanley decision represents an important evolution with respect to the deduction of VAT by financial businesses. As a result, such businesses should review their VAT deductions with an eye to determining whether they are compatible with the CJEU’s Morgan Stanley decision. We will be following this decision with high interest as we await the coming French Administrative High Court decision’s regarding its application within the next few months.
Rebecca Afana Elanga