The case—Crédit Lyonnais (case C-388/11)—was referred to the CJEU by the French supreme court (Conseil d’Etat). The principal question in the referral concerns the territorial scope of VAT and specifically how does a company established in one EU Member State take into account the income earned by its branches in other EU Member States for purposes of determining the amount of deductible VAT.
Prior CJEU judgment
The French company based its global pro rata treatment on a prior judgment of the CJEU in FCE Bank (case C-210/04 (23 March 2006)). That judgment addressed supplies of services between a company and its fixed establishments, which were found to be outside the scope of VAT, since the entities were regarded as a single taxpayer.
In general, entities of a corporate group (head offices and branches) are regarded as one taxable person with respect to their internal operations. Thus, the corporate headquarter office cannot charge goods and services to the branch offices, resulting in a loss of a right to a deduction, and contrary to the principle of neutrality. To avoid this result, a global pro rata VAT deduction (taking into consideration the activities performed by the branches) is needed.
CJEU Advocate General’s opinion
Some governments, the European Commission, and the CJEU Advocate General have not agreed with applying a global pro rata VAT deduction.
In his late February 2013 opinion,* the Advocate General noted that although a headquarters office and branches form only one taxable person, this conclusion had not been extended to a determination of a company’s right to VAT deductions.
Also, the Advocate General pointed out even if VAT is subject to a common EU legal regime, it remains a tax within the sovereignty of the EU Member States. Thus, for example, practical arrangements to exercise the right of deduction depend, to a large extent, on certain decisions made by the EU Member States.
The Advocate General considered that in applying EU rules, the right of deduction must correspond as closely as possible to the VAT input deduction, but this requirement does not imply an obligation for EU Member States to allow for total turnover (i.e., including turnover of branches established in other EU Member States) to be systematically taken into account for purposes of calculating the deductible proportion.
Finally, a claim that such treatment would be an infringement of the equal treatment would not be admissible because a company that has its headquarters and branches in the same EU Member State is not in the same position as another company that has headquarters and branches in different EU Member States.
Accordingly, EU Member States would not be required to allow taxpayers to use a global pro rata deduction.
*The Advocate General’s opinion is not binding on the CJEU. Rather, it is the role of the Advocates General to propose to the court, in complete independence, a legal solution to the cases for which they are responsible. With the opinion, the judges begin their deliberations in the case, with judgment to be given at a later date.