In January 2019, the European Court of Justice ruled that a branch registered in a Member State can deduct, in this State, the VAT encumbering its expenses for mixed use used exclusively for operations undertaken by its foreign registered office and its overheads, contributing to the achievement of its own operations and those of the registered office, by applying pro rata deductions, the terms of calculation of which differ according to the operations to which these expenses are allocated.
As they are expenses for mixed use incurred by a branch for the needs of both the taxed operations and the exempt operations of its foreign registered office, the Court specifies that the VAT having encumbered them can only be deducted pursuant to a deductible proportion (flat rate taxation coefficient in France) determined, in compliance with Article 173 (1) par. 2 of the Directive, “for all the transactions carried out by the taxable person”.
This deductible proportion, the denominator of which is formed by the VAT-exclusive turnover relating to only these operations (to the exclusion of the economic operations undertaken by the taxable person) and the numerator of which is formed by the VAT-exclusive turnover of the taxed operations of the registered office which would also give entitlement to deduction if they were undertaken in the Member State of registration of the branch (including when this entitlement to deduction results from the exercise of an option for taxation), should therefore be applied.
With this judgment, the Court of Justice introduced a measure of allocation in measuring the extent of the right to deduct the VAT having encumbered the expenses for mixed use of branches situated in a Member State other than that of the registered office. This solution, while it has the merit of striving towards greater VAT neutrality, has the drawback of requiring taxable persons to calculate different deductible proportions according to the allocation of the said expenses.
The determination of the extent of the deduction entitlements of these branches will thus be particularly complex, especially since it also requires, we remind you, a prior allocation of their expenses that can be associated exclusively to the taxed operations or to the exempt operations of the branch, the registered office, or both entities.
