In the corporate tax world, the relationship between a head office and its foreign branch is clear: the branch is considered a separate entity and should be attributed profits that it would earn if it was an independent company engaged with other parts of the enterprise in the same activities under the same conditions.
In the VAT world, the head office – branch relationships are far more complex. As the VAT Directive is silent on this matter, the Court of Justice of the European Union (CJEU) was asked to provide guidance. In its first decision commenting on the relationship between the head office and its branch (FCE Bank, C-210/04), the CJEU ruled that no VAT should be levied on services provided by the UK head office to its Italian branch as there was no legal relationship between both parties. The fact that the UK head office was part of a VAT group was not considered important and was not even mentioned in the judgment.
Nearly twelve years later, the existence of a VAT group became a relevant factor in determining the VAT treatment of head office – branch transactions. The case Skandia America Corporation (C-7/13) was about the taxability of services between an American head office and a Swedish branch that formed part of a Swedish VAT group. The CJEU took the view that the head office supplied services not to its branch but to the Swedish VAT group and the group should account for VAT on these services.
Yesterday the CJEU delivered a judgement in a highly-anticipated case Danske Bank (C-812/19) on whether costs allocated by a Danish head office – which was a member of a local VAT group – to a branch in Sweden should be subject to Swedish VAT. This is a “reverse Skandia” scenario as it was not the branch but the head office that was part of the VAT group. The CJEU ruled that the Danish head office and the Swedish branch should be regarded as separate taxable persons, so that the allocation of costs to the Swedish branch was subject to Swedish VAT.
The Danske Bank decision brought clarity on the following matters: it is irrelevant whether the head office (Danske Bank) or the branch (Skandia) forms part of the VAT group. The location of both entities – European Union (Danske Bank) or a third country (the head office in Skandia) does not make any difference either. Finally, they type of expenses – internal costs versus remuneration for services – does not have any impact on the VAT treatment of transactions. If any part of an enterprise (head office or branch) joins a VAT group, it will be regarded a separate taxable person from other foreign establishments belonging to the same enterprise.
Bank of China (C-737/19) is another case where a decision about head office – branch relationships is eagerly awaited. In this case, the CJEU is expected to shed some light on the scope of input tax deduction of branches that perform activities for their head offices. Based on its previous judgements (Le Credit Lyonnais and Morgan Stanley), we know that the head office and its branch should not be considered a single entity for the purposes of VAT deduction: if the branch carries out its own economic activities in its country of establishment, its turnover is subject to the laws of that country and not to the laws of the head office. However, if the branch incurs costs that are used by the foreign head office to perform its transactions, the turnover of the head office needs to be taken into account in calculating the deductible proportion.