What must EU branches consider when determining their VAT recovery calculation? - Tax and Legal blog

Deloitte Tax blog_Indirect tax

As per Morgan Stanley CJEU judgment (C-165/17, 24 January 2019), EU branches incurring VAT on expenses used wholly or partly for EU head office supplies, must consider the activity of the head office to determine their VAT recovery calculation.


The French branch of Morgan Stanley, a financial services business with a UK head office, has taxable income (banking and financial operations which the branch opted to tax) and income that is outside the scope of VAT (between the head office and the branch).

The taxpayer had been recovering the French input tax in full in accordance with the recovery rate of its French branch. The French tax authorities assessed Morgan Stanley on this input tax recovery by where that input tax was used exclusively, or partly, for mixed activities carried out by its head office.

CJEU’s findings

In summary, the CJEU found that it is necessary to consider the VAT recovery of supplies in both France and the UK, and only to the extent that those supplies give right to recovery in both Member States can the branch deduct the VAT on the associated expenses. This formalises the CJEU’s earlier judgment in Monte Dei Paschi Di Siena (C-136/99).

The CJEU limited its judgment to the two questions raised:

  1. Costs incurred by a branch used exclusively by its ‘principal establishment’ in another Member State i.e. the head office, where that principal establishment uses those costs to make supplies which both give the right to deduct VAT, and those which do not.
  2. Costs incurred by a branch used partly by that branch and partly by the principal establishment: in both cases, where those costs are used for supplies which do and do not give the right to deduct VAT.

The CJEU proposed a different VAT recovery formula for the two scenarios. The references to the UK and France in the calculations represent how the calculations would work in the case at hand.

Scenario 1 – Exclusive use by the principal establishment


Taxable turnover to which the expenses relate,

which permits VAT deduction in both the UK and France


 Total turnover to which the expenses relate


Scenario 2 – Use by both the branch and principal establishment


Taxable turnover of the French branch + taxable turnover of UK head office

(where that same turnover would also be taxable in France) 


Total turnover of French branch and UK head office



The CJEU has confirmed that:

  • the allocation of expenses by an establishment should be the first step to determine the applicable VAT recovery methodology;
  • to the extent overseas activities are included in a VAT recovery methodology, those activities must give rise to VAT recovery in both jurisdictions. As noted above, the appropriate methodology to use and activities to include depends on the use, and allocation, of the expenses in question.

Of course, there remain practical questions such as how VAT group turnover and non-turnover based VAT recovery methods might be reflected in the above calculations. Also, the interpretation by local tax authorities in scenarios other than those analysed by the CJEU (e.g. EU branch with a head office outside the EU) will have to be monitored.

Nevertheless, groups should review their position in the light of the judgment, prepare a robust VAT calculation/costs allocation documentation and have a closer look at their TP documentation as VAT aspects are often disregarded.


By Constant Dimitriou – Director, Indirect Tax

If you would like to discuss more on this topic, please do reach out to Constant Dimitriou.


Constant Dimitriou - Director, Indirect Tax

Constant is specialised in EU and Swiss VAT. He advises companies active in all sectors with a focus on the financial sector. He notably assists banks and insurance companies regarding the VAT treatment of their activities, the input VAT recovery calculation, VAT groups, rulings, audits, etc. in Switzerland and the EU.



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