Flashback on ECJ cases C-388/11 (Le Crédit Lyonnais) – Taxpayer is not allowed to take into account the turnover of foreign branches for VAT refunds

On Sept 12, 2013, the ECJ issued its decision in the case C-388/11 (Le Crédit Lyonnais). This case is about a French bank with foreign branches and whether it is allowed to take account of its foreign branches’ turnover when calculating the portion of deductible VAT

Context: Value added tax – Sixth Directive 77/388/EEC – Articles 17 and 19 – Deduction of input tax paid – Use of goods and services for both taxable and exempt transactions – Proportional deduction – Calculation of the proportion – Branches established in other Member States and in third States – Not taking their turnover into account

Article in the EU VAT Directive

Article 17(2), (3) and (5) and Article 19 of Sixth Council Directive 77/388 (Article 168, 169, 170, 173, 174, 175 of the EU VAT Directive 2006/112/EC)

Article 168 (Right to deduct VAT)

In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;
(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18(a) and Article 27;
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
(d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22;
(e) the VAT due or paid in respect of the importation of goods into that Member State.

Article 169
In addition to the deduction referred to in Article 168, the taxable person shall be entitled to deduct the VAT referred to therein in so far as the goods and services are used for the purposes of the following:
(a) transactions relating to the activities referred to in the second subparagraph of Article 9(1), carried out outside the Member State in which that tax is due or paid, in respect of which VAT would be deductible if they had been carried out within that Member State;
(b) transactions which are exempt pursuant to Articles 136a, 138, 142 or 144, Articles 146 to 149, Articles 151, 152, 153 or 156, Article 157(1)(b), Articles 158 to 161 or Article 164;
(c) transactions which are exempt pursuant to points (a) to (f) of Article 135(1), where the customer is established outside the Community or where those transactions relate directly to goods to be exported out of the Community.

Article 170
All taxable persons who, within the meaning of Article 1 of Directive 86/560/EEC ( 1 ), Article 2(1) and Article 3 of Directive 2008/9/EC ( 2 ) and Article 171 of this Directive, are not established in the Member State in which they purchase goods and services or import goods subject to VAT shall be entitled to obtain a refund of that VAT insofar as the goods and services are used for the purposes of the following: ▼B
(a) transactions referred to in Article 169;
(b) transactions for which the tax is solely payable by the customer in accordance with Articles 194 to 197 or Article 199.

Article 173 (proportional deduction)
1. In the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to Articles 168, 169 and 170, and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible.
The deductible proportion shall be determined, in accordance with Articles 174 and 175, for all the transactions carried out by the taxable person.
2. Member States may take the following measures:
(a) authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;
(b) require the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;
(c) authorise or require the taxable person to make the deduction on the basis of the use made of all or part of the goods and services;
(d) authorise or require the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph of paragraph 1, in respect of all goods and services used for all transactions referred to therein;
(e) provide that, where the VAT which is not deductible by the taxable person is insignificant, it is to be treated as nil.

Article 174
1. The deductible proportion shall be made up of a fraction comprising the following amounts:
(a) as numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible pursuant to Articles 168 and 169;
(b) as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.
Member States may include in the denominator the amount of subsidies, other than those directly linked to the price of supplies of goods or services referred to in Article 73.
2. By way of derogation from paragraph 1, the following amounts shall be excluded from the calculation of the deductible proportion:
(a) the amount of turnover attributable to supplies of capital goods used by the taxable person for the purposes of his business;
(b) the amount of turnover attributable to incidental real estate and financial transactions;
(c) the amount of turnover attributable to the transactions specified in points (b) to (g) of Article 135(1) in so far as those transactions are incidental.
3. Where Member States exercise the option under Article 191 not to require adjustment in respect of capital goods, they may include disposals of capital goods in the calculation of the deductible proportion.

Article 175
1. The deductible proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next whole number.
2. The provisional proportion for a year shall be that calculated on the basis of the preceding year’s transactions. In the absence of any such transactions to refer to, or where they were insignificant in amount, the deductible proportion shall be estimated provisionally, under the supervision of the tax authorities, by the taxable person on the basis of his own forecasts.
However, Member States may retain the rules in force at 1 January 1979 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession.
3. Deductions made on the basis of such provisional proportions shall be adjusted when the final proportion is fixed during the following year.

Facts

LCL is a bank which has its principal establishment in France and branches in EU Member States and in third States.
Following an examination of the accounts of LCL for the period from 1 January 1988 to 31 December 1989, and two adjustment notices, the tax administration assessed LCL for arrears, inter alia, of VAT in respect of that period. Those arrears result from that administration’s refusal to take account, unlike LCL in its declarations, of the interest on loans granted by LCL’s principal establishment to its branches established outside France, in the numerator and the denominator of the deductible proportion laid down for VAT by Article 212 of Annex II to the CGI.
On 20 July 1994, LCL lodged its first objection to the declaration of those arrears, claiming that the amount of the interest in question could be taken into account in calculating the deductible proportion of VAT. In a second objection of 31 December 1996, it asked for a refund of the sums which it considered it had overpaid for the periods in question and of those which it had paid, in 1990 and in 1991, in respect of the period from 1 January to 31 December 1990, maintaining that, while the amount of interest invoiced by the principal establishment to the branches could not be taken into account on the ground that its principal establishment, together with its foreign branches, all formed part of one and the same entity, the income from the transactions which the branches carry out with third parties should be regarded as their own income and be taken into account in calculating the deductible proportion applied to it.
Since those complaints were rejected by the tax administration, LCL appealed to the tribunal administratif de Paris (Administrative Court, Paris) (France) which, by judgment of 5 October 2004, dismissed that appeal. Its appeal against that judgment also having been dismissed, LCL appealed on a point of law to the French Conseil d’État (Council of State).
In support of its appeal, LCL claims that, in order to determine the deductible proportion of expenses of its principal establishment for VAT purposes, the income of its branches established in other EU Member States and in third States should be taken into account, in so far as those branches must, following the judgment in Case C‑210/04 FCE Bank [2006] ECR I‑2803, be regarded as constituting with that principal establishment, in so far as concerns the relations between them, a single taxable person.
It maintains that by holding, first, that branches established in an EU Member State are themselves subject to VAT and take account, in determining their own deductible proportions, of the abovementioned income, which cannot therefore give rise to a further right of deduction in favour of the principal establishment, and, second, that branches established outside the EU, which are entitled either not to be subject to VAT, or to be subject to other rules, constitute ‘distinct sectors of business’ for the purposes of exercising the right to deduct, the cour d’administrative d’appel de Paris (Administrative Court of Appeal, Paris) adopted an interpretation which is incompatible with the Community principle of neutrality of the common system of VAT.

Questions

Having regard to the rules on the territorial scope of value added tax, can Article 17(2) and (5) and Article 19 of the Sixth Directive 77/388/EEC ¹ be interpreted as meaning that, for calculation of the deductible proportion for which they provide, the principal establishment of a company established in a Member State must take account of the income achieved by each of its branches established in another Member State and, correspondingly, those branches must take account of the totality of income falling within the scope of value added tax achieved by the company?

Must the same solution be adopted for branches established outside the European Union, particularly in the light of the right to deduct provided for by Article 17(3)(a) and (c), in relation to the banking and financial operations referred to in Article 13B(d)(1) to (5), which are carried out for the benefit of customers established outside the Community?

Might the answer to the first two questions vary from one Member State to another, depending on the options made available by the last subparagraph of Article 17(5), particularly with regard to the establishment of different sectors of business?

If the answer to either of the first questions is affirmative, first, is it appropriate to limit the application of a deductible proportion of that kind to calculation of rights to deduct value added tax that has been charged on expenses incurred by the principal establishment for the benefit of foreign branches and, second, must income achieved abroad be taken into account in accordance with the rules applicable in the State of the branch or in the State of the principal establishment?

AG Opinion

Article 17(2), (3) and (5) and Article 19 of Sixth Council Directive 77/388 of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes ? Common system of value added tax: uniform basis of assessment must be interpreted as not requiring Member States to provide that account is to be taken, in the calculation of the deductible proportion of a company with its principal establishment in their territory, of the turnover of that company’s branches established in other Member States or in third States.

Decision

1. Article 17(2) and (5) and Article 19(1) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, 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 other Member States.

2. Article 17(3)(a) and (c) and Article 19(1) of the Sixth Directive 77/388 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 States.

3. The third subparagraph of Article 17(5) of the Sixth Directive 77/388 must be interpreted as not permitting 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.

Summary

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 was permitted to include the turnover of its branches in calculating the deductible proportion, the laws of other countries would be seriously jeopardized.

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