Key VAT issues affecting companies with significant cross-border operations conducted through branch offices have been referred to the ECJ.

The issues particularly affect the calculation of VAT pro rata by banks with operations in non-EU countries.

The case was initiated by Le Credit Lyonnais, a longstanding CMS client, when the French authorities refused to allow interest on loans granted by LCL’s French head office to its foreign branches to be taken into account when calculating LCL’s pro rata VAT deduction, on the basis that they were the same legal entity.

LCL argued that, if correct, this meant that pro-rata calculations should include its global operations, including turnover of its branch offices. This would significantly improve LCL’s pro rata VAT deduction in France, as its non-EU branch offices mainly cater for non-EU clients, for which a VAT deduction is available (unlike transactions conducted for EU clients).

The ECJ has now been asked for a preliminary ruling whether:

  • pro rata for a tax payer’s head office should be calculated by reference to turnover from all branch offices in other member states
  • pro rata for each EU country branch office should be calculated by reference to the taxpayer’s total turnover?
  • pro rata for each non-EU country branch office should also be calculated by reference to the taxpayer’s total turnover, given the right to deduction related to financial operations where the recipient of the service is established outside the EU
  • the method of calculating pro rata deductions can differ from one member state to another, depending on the details of implementing pro-rata calculation rules (such as the possibility of distinct business sectors)
  • the application of global pro rata can be limited to head office costs incurred for the benefit of foreign branch offices
  • turnover from a particular country can be taken into account according to the national rules applicable in the country where the branch office or head office is situated

Law:  Council Directives 77/388/CEE and 2006/112/EC