In a decision dated November 4, 2020 (no. 435295, “BNP Paribas Securities Services”), the French Administrative Supreme Court (Conseil d’Etat) has applied for the first time the “Skandia” case law (CJEU, C-7/13, September 17, 2014) relating to the VAT treatment of flows between a head office and its branch when the latter is a member of a VAT group.
As a reminder, the CJEU ruled in this case that supplies of services rendered from a foreign head office (US in this particular case) to its branch which was a member of a local VAT group in its EU Member State (Sweden in this case), are subject to VAT, the person liable for the corresponding VAT being the VAT group according to the reverse charge mechanism. This judgment had not been commented on by the French tax authorities.
In the BNP Paribas Securities Services case, the French tax authorities had considered that the VAT borne on expenses exclusively used for internal operations (cost reallocations) carried out by the French head office with its branches established in other EU Member States (namely Germany, Spain and the UK) could not be deducted on the grounds that these operations were outside the scope of VAT, but they had nevertheless allowed, by tolerance, the deduction of a fraction of the VAT by taking into account the VAT pro-rata of the branches. This reasoning is quite similar to that of the tax authorities in the Morgan Stanley case, which concerned the opposite case of a French branch and a foreign head office.
As a reminder, the CJEU had notably ruled in the Morgan Stanley case (January 24, 2019, C-165/17) that the VAT charged on expenses incurred by a French branch and exclusively used for the needs of the operations of the UK head office could only be deducted on condition that the said operations opened a right to recover VAT both in the Member State of the head office (UK) and in France. However, neither the CJEU nor the French Administrative Supreme Court had been called upon to rule on the VAT consequences of the UK head office belonging to a local VAT group.
In this new case, the French Administrative Supreme Court considers, for the first time, on the basis of the Skandia case law “that services supplied by a principal establishment to its branch established in another Member State constitute taxable transactions when the latter is a member of a VAT group“.
In this context, cost reallocations to EU branches that are members of local VAT groups are not considered as internal transactions that are not subject to VAT but as transactions that fall within the scope of VAT and that may where applicable give rise to a right of deduction. Thus, for the French Administrative Supreme Court, “the deductibility of the VAT on expenses incurred by the head office depended on the re-invoicing operation to the VAT groups to which these branches belong and not on the subsequent operations carried out by these VAT groups”.
Finally, it is worth reminding that the CJEU should be led, in the Danske Bank A/S case (C-812/19), to rule on the reverse case of costs allocated by a head office which is a member of a VAT group in its Member State to its branch located in another Member State and not belonging to any local VAT group (“reverse Skandia”).