In the area of VAT, the relationship between a head office and its foreign branches has always been a tricky one. Unlike in direct taxation where profits are attributed to a permanent establishment on the basis of a separate entity approach and the arm’s length principle, for VAT purposes a branch may qualify as independent taxable person or form a single entity with the head office. Things get even more complicated if either the branch or the head office join a VAT group. Another area of complexity is how to calculate the deductible input VAT if the branch incurs costs that are also used by the head office. The VAT legislation is silent on the above-mentioned problems and the only guidance can be found in the jurisprudence of the Court of Justice of the European Union (CJEU). This article provides an overview of the most important judgements.
FCE Bank (C-210/04)
In its first landmark decision concerning transactions between a branch and its head office, the CJEU ruled that VAT may be levied on services provided by the UK head office to its Italian branch if there is a legal relationship between both parties. Such a relationship may exist if the branch independently performs an economic activity and bears the economic risk arising from its business. As the Italian branch did not bear any risk, the CJEU concluded that the services in question were not subject to VAT.
Skandia America (C-7/13)
The case concerned the taxability of supplies of services between an American head office and a Swedish branch that formed part of a Swedish VAT group. The taxpayer assumed that such services were not taxable as they were performed within the same legal entity. However, the CJEU took the view that supplies of services made by a third party to a member of a VAT group must be considered to have been made not to that member but to the VAT group. Therefore, the Swedish VAT group should have accounted for VAT under the reverse charge mechanism.
Le Crédit Lyonnais (C-388/11)
The CJEU ruled that a French bank with foreign branches was not allowed to take account of its foreign branches’ turnover when calculating the portion of deductible VAT but the right of deduction should be determined independently for each jurisdiction. If the head office were permitted to include the turnover of its branches in calculating the deductible proportion, the laws of other countries would be seriously jeopardized.
Morgan Stanley (C-165/17)
This case concerned the scope of input VAT deduction of a French branch that performed taxed financial services for its French clients and non-taxable internal activities for the UK head office which carried out both taxable and exempt supplies. The branch fully recovered VAT on the costs it incurred believing that only the taxed French-sourced turnover was relevant for the calculation of the input VAT deduction. However, the CJEU held that the turnover of the foreign head office also needed to be taken into account.
Bank of China (C-737/19)
Last year the CJEU was asked for a preliminary ruling to determine whether the Morgan Stanley judgment also applies if the head office is established outside the European Union. If this question is answered in the affirmative, the referring court would like to know under which conditions banking transactions carried out by the head office established in a third country may be regarded as giving rise to a right to input VAT deduction in the Member State of the branch. The CJEU has not rendered its judgement yet.
Danske Bank (C-812/19)
This case is about a “reverse Skandia” scenario. The Swedish Supreme Court asked the CJEU whether services provided by a Danish head office – which is a member of a local VAT group – to a branch in Sweden should be subject to Swedish VAT. In other words, the question is whether the branch should be considered an independent taxable person when receiving a service from the head office because the latter belongs to a VAT group. The CJEU has not rendered its judgement yet.