France: VAT recovery by branches of foreign companies | KPMG Global
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France: VAT recovery by branches of foreign companies

France: VAT recovery by branches of foreign companies

Questions concerning the value added tax (VAT) rights of recovery by French branches of foreign companies have been referred to the Court of Justice of the European Union (CJEU).


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The French Supreme Administrative Court (Conseil d’Etat) on 29 March 2017 referred two questions to the CJEU in the Morgan Stanley case. 


A French branch of a UK investment company conducted a taxable activity regarding French domestic customers and also rendered services to its UK head office—thus, qualifying as a “mixed” branch.  

During a tax audit, the French tax authorities considered that the French VAT incurred on expenses and activities engaged in by the French branch and dedicated to operations carried out by the head office, could not be deducted on the grounds that the transactions were “outside the scope” of the VAT. As regards the mixed expenses, the French tax authorities considered that the mixed expenses were only partially deductible and applied the deduction ratio of the head office, corrected by the turnover of the branch.  

In a judicial challenge, the Administrative Court of Appeal issued what has been described as an unprecedented and particularly unfavorable decision for the taxpayer. In general, the court concluded that services rendered by a French branch to its foreign head office are to be characterized as “out-of-scope transactions,” and for which VAT is not deductible. According to the court, the rules applicable to partially taxable persons are to be applied—meaning internal revenues at the level of the VAT liability ratio (coefficient d’assujettissement) are to be considered. An appeal was filed with the Supreme Administrative Court (Conseil d’Etat).

Questions referred to the CJEU

In an action dated 29 March 2017, the Supreme Administrative Court found that a French branch is entitled to deduct the amount of VAT incurred on goods and services used not only for the purposes of its taxable transactions but also for purposes of the operations conducted by its foreign head office (based on ESET case C-393/15).   

Still, even with this more favorable position, the French Supreme Administrative Court turned the discussion from the principle of the VAT deduction—partly clarified—to the more practical question of the computation of the recovery ratio that must be taken into account at the French branch’s level. To clarify this issue, the Supreme Administrative Court referred two questions to the CJEU. 

First, in a situation when expenses incurred by a branch are exclusively used for the purpose of operations carried out by its head office, does the EU Member State where the branch is located apply:

  • The recovery ratio of the branch, determined on the basis of the operations carried out in the Member State where it is located and according to the rules applicable in this country? or 
  • The recovery ratio of the head office? or
  • A specific recovery ratio determined by combining the rules applicable in the Member State where the branch is established and the rules of the Member State of the head office? 

Second, what rules are to be applied in the particular case of mixed expenses used for both the French branch’s activity and the head office’s activity?

KPMG observation

Tax professionals with Fidal* note that in the light of these questions, the Morgan Stanley case is not yet settled, and that it is interesting to see that the principle of the right of deduction of French branches for services rendered to their head offices seems, for the time being, to be clarified—not to say clearly confirmed—by the French Supreme Administrative Court. However, from a practical standpoint, considering that the French Supreme Administrative Court has raised questions on the computation method of the VAT recovery rights, the anticipated judgment of the CJEU could have a substantial impact on VAT recovery rights of many French branches having a mixed activity.


For more information, contact a tax professional with Fidal in Paris:

Philippe Breton | +33 (0)1 55 68 14 34 |

Romain Dayan | + 33 (0) 1 55 68 17 63 |

Robin Maubert | + 33 (0) 1 55 68 14 57 |

* Fidal is a French law firm that is independent from KPMG and its member firms.

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