• Service: Tax, Global Indirect Tax, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 9/13/2013

France - CJEU addresses deductible proportion of foreign branch-related VAT 

September 13: The Court of Justice of the European Union (CJEU) this week issued a judgment concluding that a company having its principal establishment in an EU Member State may not take into account, for purposes of calculating the deductible proportion of value added tax (VAT), the turnover of its foreign branches. Le Crédit Lyonnais v. Ministre du Budget, C-388/11 (12 September 2013)

The CJEU found that the Sixth VAT Directive does not provide for the application of a “worldwide proportion” mechanism.


As explained in a CJEU release [PDF 160 KB], the taxpayer is a bank with its principal establishment in France and foreign branches in other EU Member States.

Following an audit by the French tax administration, two adjustment notices were issued to the bank and a VAT assessment of approximately €31.7 million was made for a two-year period, 1988 to 1989.

The basis for the VAT assessment was that the bank took into account the amount of interest on loans granted to its foreign branches in calculating its deductible proportion of VAT.

The bank paid the VAT assessment and then initiated a refund action in the French courts. The bank claimed that its principal establishment and branches were all part of the same entity, and that income from transactions between the branches and third parties must be regarded as the branches’ own income and thus must be taken into account in calculating the deductible proportion applied to it (under a “worldwide turnover” standard).

The Conseil d’État referred the case to the CJEU with a request to clarify an interpretation of the Sixth VAT Directive—specifically, whether a company with a principal establishment situated in one EU Member State and foreign branches must—to the extent that the company conducts transactions for which VAT is and is not deductible—take into account its total turnover of both the principal establishment and the branches.

CJEU judgment

In its judgment today, the CEJU found:

  • The method of repayment of VAT (by deduction or by refund) depends solely on the place where the taxable person is established (principal establishment but also any fixed establishments situated in the other EU Member States) and that a company that has its principal establishment in one Member State and a fixed establishment in another Member State must be considered as being established in that second Member State for the activities conducted there and can no longer claim a refund of VAT.
  • The VAT Directive must be interpreted as meaning that, in determining the deductible proportion of VAT, a company—the principal establishment of which is situated in a Member State—may not take into account the turnover of its branches established in third countries.
  • The VAT Directive does not permit an EU Member State to adopt a rule allowing a deductible proportion per sector of business of a company subject to tax which authorizes that company to take into account the turnover of a branch established in another EU Member State or in a third country.

Read a September 2013 report [PDF 150 KB] prepared by the KPMG member firm in Luxembourg: Crédit Lyonnais (C-388/11)

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