Bank’s branch’s full entitlement to VAT deduction

A branch of an investment bank in France received supplies intended for internal use and for the needs of its principal establishment in Great Britain. The branch opted to tax the services provided to its clients in France in accordance with French legislation. Simultaneously, services provided by the headquarters seated in Great Britain were treated as exempt from VAT without the entitlement to VAT deduction.

The French branch claimed the full entitlement to a deduction of VAT on the supplies at issue. It assumed that it had been providing partly taxable supplies to its customers and partly supplies with the entitlement to VAT deduction to its incorporator. The French tax administrator denied the branch’s entitlement to deduction, claiming that the branch and the incorporator represent a single person liable to VAT and that the received taxable supplies were partly used in respect of supplies that are exempt from VAT without the entitlement to VAT deduction.

In part, the CJEU sided with the French tax administrator: the branch and the incorporator must indeed be regarded a single person liable to VAT and, as a result, supplies giving rise to entitlement to VAT deduction do not occur in transactions between these two entities. However, the CJEU did not reject the claimed entitlement to VAT deduction.

When assessing the entitlement to a deduction of VAT on supplies used by the principal establishment, it is according to the CJEU necessary to take into account the VAT regime that would be applied if the output transaction had been carried out in France. The branch had opted beforehand that it would tax its services in France; consequently, it is entitled to a full deduction even if the received supplies were partly provided in connection with VAT-exempt supplies without the entitlement to VAT deduction in another EU member state.