On 12 September 2013, the Court of Justice of the European Union (“CJEU”) released its long-awaited decision in the case C-388/11, Le Crédit Lyonnais (“LCL”).
The CJEU held that a principal establishment situated in a Member State cannot take into account the turnover of its branches established in other Member States or established in third States to compute its input VAT recovery ratio.
The French bank LCL, which has its principal establishment in France and several branches abroad (in other EU Member States and outside of the EU), took the amount of interest on loans granted to its branches established outside of France into account for the calculation of the prorata of recoverable input VAT.
In the course of a tax audit, the French tax administration performed a VAT assessment arguing that LCL wrongly took into account the amount of interest on loans granted to its foreign branches for the calculation of its prorata.
LCL claimed that it was wrongfully forced to overpay input VAT (amounting to almost 31.7 million EUR) and initiated legal steps which eventually brought this matter to the attention of the CJEU.
LCL argued that, while the amount of interest received by the principal establishment for loans granted to its branches could not be taken into account for the calculation of the prorata, as the principal establishment and its branches form one single entity for VAT purposes (FCE Bank case, C-210/04), the turnover generated by the branches deriving from transactions with third parties should be considered as the principal establishment’s turnover and taken into consideration for the computation of its VAT recovery ratio (so-called “worldwide turnover”).
The French Council of State (“Conseil d’Etat”) referred to the CJEU for a preliminary ruling and asked whether and to what extent a company whose principal establishment is established in one Member State and which has several branches abroad performing mixed activities (i.e. generating turnover entitling to deduct input VAT and turnover not entitling to deduct input VAT) must take the total (i.e. worldwide) turnover into account for the calculation of its local input VAT recovery right, based on the Sixth Directive (PDF, 887KB).
The Court held that a principal establishment situated in a Member State cannot take into account the turnover of its branches, whether established in other EU Member States or in third States, to compute its local input VAT recovery ratio.
The CJEU pointed out that the Sixth Directive does not contain specific rules on the computation of the prorata of deductible input VAT, but leaves it to the Member States to specify the methods of calculation1. However, the CJEU held that the Sixth Directive does not permit the Member States to implement rules for the calculation of the proportion of deductible input VAT per sector of business of a company subject to tax which authorizes that company to consider the turnover realized by foreign branches for the prorata.
Even though the CJEU had to decide in case of a bank, this decision does not only affect banks, but has an impact on all principal establishments that generate turnover through their foreign branches.
The CJEU’s decision is straightforward leaving hardly any room for interpretation. Therefore, it is likely that the Luxembourg VAT authorities (“Administration de l’enregistrement et des domaines”) will take this case as an opportunity to increase their focus on the calculation of the prorata of deductible input VAT by taxable persons having their principal establishment in Luxembourg and, possibly, to reassess VAT for principal establishments.
In the light of this decision, principal establishments should carefully review the calculation of their VAT recovery right to ensure that their methods are in line with both the CJEU’s decision and with the VAT authorities’ Circular n° 765. In case of divergences, principal establishments should initiate alterations where necessary without any undue delay.
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1. In this context, please note that the Luxembourg VAT Authorities have recently published Circular n° 765 generally specifying the means for the calculation of deductible input VAT applicable in Luxembourg. The new Circular is applicable as of fiscal year 2013.
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