Brussels, 12/09/2013 (Agence Europe) - A company whose principal establishment is in a member state may not take into account, in order to calculate its deductible proportion of VAT, the turnover of its branches established abroad because the sixth VAT directive (77/388/EEC) does not allow for a “worldwide proportion system”.
In a ruling issued on Thursday 12 September, the European Court of Justice responded to a request from the French Conseil d'Etat about a dispute between Le Crédit Lyonnais (LCL) bank and the French tax authorities. The Conseil d'Etat wanted to know whether the sixth VAT directive meant that it was lawful for a company registered in a member state that has branches abroad to take into account the amount of interest on loans granted to its branches established outside France in order to calculate the deductible proportion of VAT applicable to the bank, in other words whether it can calculate tax using a worldwide proportion system.
In the ruling, the Court of Justice points out that the deduction system laid down in the directive is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that those activities are subject to VAT. In particular, where the VAT relates to goods or services used by the taxpayer both for transactions in respect of which VAT is deductible and for transactions in respect of which it is not, only such proportion of the VAT is deductible as is attributable to the former taxable transactions. The right to deduct is quantified according to a proportion fixed in accordance with the directive. The Court makes it clear that the method of repayment of VAT (by deduction or by refund) depends solely on the place where the taxable person is established (principal establishment but also any fixed establishments situated in the other member states). Thus, a company which has its principal establishment in one member state and a fixed establishment in another member state must be considered, by virtue of that fact, as being established in the last-mentioned member state for the activities carried out there and can no longer claim a refund of the VAT. It is for that fixed establishment to seek, from the tax authorities of that state, deduction of VAT in respect of the acquisitions made there.
On the questions raised by the Conseil d'Etat, since the Court has held that the fixed establishment situated in a member state and the principal establishment situated in another member state constitute a single taxable person subject to VAT, it follows that a taxpayer is subject, in addition to the system which applies in the state of its principal establishment, to as many national systems of deduction as there are member states in which it has fixed establishments. As the methods of calculation of the proportion constitute a fundamental element of the deduction system, account cannot be taken, in the calculation applicable to the principal establishment of a taxpayer established in a member state, of the turnover of all the taxable person's fixed extablishments in other memberstates the method of repayment of VAT (by deduction or by refund) depends solely on the place where the taxable person is established (principal establishment but also any fixed establishments situated in the other member states). Thus, a company which has its principal establishment in one member state and a fixed establishment in another member state must be considered, by virtue of that fact, as being established in the last-mentioned member state for the activities carried out there and can no longer claim a refund of the VAT. It is for that fixed establishment to seek, from the tax authorities of that state, deduction of VAT in respect of the acquisitions made there.
The Court of Justice says that the directive must be interpreted as meaning that, in determining the deductible proportion of VAT applicable to it, a company, the principal establishment of which is situated in a member state, may not take into account the turnover of its branches established in third countries. It says there is no support in the directive for a finding that the fact that a taxable person has a fixed establishment outside the EU can affect the deduction system to which that taxable person is subject in the member state in which its principal establishment is situated. The Court thus rejects LCL's argument according to which a company which has a branch in a third state must, for VAT purposes, be treated in the same way as a company which has a subsidiary in that state. In fact, according to the Court, those different possibilities reflect situations which are clearly different and cannot therefore be treated in the same way by the tax system.
Finally, the Court of Justice ruled that the directive does not permit a member state to adopt a rule for the calculation of the deductible proportion per sector of business of a company subject to tax which authorises that company to take into account the turnover of a branch established in another member state or in a third state. It explains that the concept of “sectors of business” refers not to geographic areas but to different forms of economic activities such as the activities of producers, traders and persons supplying services. (FG/transl.fl)