In brief

On the one hand, the Spanish Central Tax Court analyzed whether the services supplied by a Spanish branch to non-EU entities are subject to Spanish VAT. Specifically, the Spanish branch was contracted for the management and distribution of non-Spanish funds by non-EU entities. Therefore, when an investor (Spanish client) would like to invest in those funds commercialized by the non-EU entities, the Spanish branch would act as a point of contact providing supporting services to the non-EU entities in order to manage the investment.

The tax court concluded that the "use and enjoyment rule" applies and that the services provided by the Spanish branch are subject to Spanish VAT, because the services provided by the Spanish branch are ultimately effectively used in Spain, as those support services are limited to Spanish clients.

On the other hand, the tax court applied the criteria stated by the ECJ in case C-165/17, Morgan Stanley & Co. International. Therefore, in order to determine the right of deduction of the Spanish branch regarding the activities performed in Spain and the activities performed by the head office, the following analysis should be made:

(i) The transactions made by the head office that have a direct link with the acquisitions of goods/services made by the branch should be determined.

(ii) Regarding the above transactions, it should be analyzed which of them grant the deducibility right in both territories — the country in which the head office is established and the country in which the branch is established.

(iii) The right of VAT deductibility of the branch in its country of establishment should be analyzed.

Once this analysis has been made, the tax court will conclude that if there are transactions performed by the head office and the Spanish branch that generate and do not generate a VAT right of deductibility, the pro rata should be calculated as follows: (a) in the denominator all the transactions carried out by the branch in Spain and the transactions carried out by the head office referred to in point (i) above; and (b) in the numerator just those transactions of both entities that generate the VAT right of deduction in Spain.

Therefore, the tax court confirmed that the criteria to apply the pro rata in cases of EU branches and EU head offices is the one contained in the ECJ case Morgan Stanley & Co. International and not the ECJ case Securenta.