On 15 March 2017, the Public Rapporteur (equivalent to the Advocate General before the CJEU) presented her conclusions in the “Morgan Stanley” case, pending in front of the French Conseil d’Etat (Administrative Supreme Court).
It should be recalled that the Paris Administrative Court of Appeal had decided, on 27 January 2015 (N°10VE01053), that the French branch of a British head office was a partial VAT payer based on the performance, on the one hand, of taxable operations (banking and financial operations, regarding which the branch has opted for VAT) and on the other hand, of internal operations outside the scope of VAT (between the head office and the branch).
Relying on prior CJEU decisions and on the conclusions of the Advocate General in the CJEU cases Abbey National, C-408/98 and Kretztechnik, C-465/03, the Public Rapporteur considers that the internal operations (between the head office established in another EU Member state and its French branch) must be regarded as “transparent”: the head office and its branch form a single taxable person, subject to VAT on incoming and outcoming flows. Therefore, as such, the internal operations do not block the right to deduct VAT on the expenses incurred to perform these internal operations.
In this respect, a reference has been made to the ESET decision, C-393/15, which has recently acknowledged the right of the branch to deduct VAT as regards the expenses engaged on behalf of the head office established in another Member state. The Public Rapporteur has recommended to cancel the decision of the Versailles Administrative Court of Appeal.
This last point being reaffirmed, a question was raised as regards the scope of the right to deduct VAT by the French branch. On this second point, the Public Rapporteur insists on the necessity to refer a series of preliminary rulings to the CJEU.
The Public Rapporteur notably raises the question of the potential application of an apportionment, as mentioned in the Monte Dei Paschi and Sinna decision (C-136/99). It implies a foreign prorata recalculated on the basis of the French VAT rules.
In our view, such a prorata would trigger major practical issues. The foreign prorata can result from a specific method differing from the French VAT rules, which only rely on the turnover corresponding to each type of operations. The foreign group prorata may also apply, instead of the prorata applicable to the legal entity to which the French branch belongs. Considering the possibility in France to opt for the taxation of financial products, this revised apportionment could be disconnected from the extent of the foreign right to deduct VAT. In the end, this apportionment could take into consideration, in a significant manner, operations entirely unrelated to the expenses incurred in France.
As regards joint expenses (i.e. expenses incurred in order to realize both operations giving the right to deduct VAT and operations giving no right to deduct VAT), only French apportionment rules seem applicable given the terms of the French VAT regulations. However, according to the solution found in the Le Crédit Lyonnais case (C-388/11), this apportionment should only take into consideration French turnover, with the exclusion of the turnover related to the foreign head office activity.
Finally, when it comes to French branches incurring expenses while providing internal services to several foreign branches which, for some of them, can belong to a VAT grouping, we seem to be miles away from the “simplicity” of the Morgan Stanley case. All the solutions consisting in cutting out French expenses in order to include them in a series of foreign, recalculated apportionments, seem utterly impractical and unverifiable.
The French Conseil d’Etat will most probably follow the recommendations of its Public Rapporteur and will refer one or several preliminary rulings to the CJEU. All of this puts the operators in great uncertainty as to the exercise of their right to deduct VAT.