ECJ rules on computation of a ‘global’ pro rata

The Credit Lyonnais case (C-388/11) was an opportunity for the European Court of Justice to rule on the computation of the input VAT deduction right of a bank which has branches established in other EU Member States and outside the European Union. Taxand Luxembourg summarises the case proceedings.

The question was whether the principal establishment should take into account the turnover realised by its branches located in and outside the EU for the computation of its VAT deduction right.

Following the AG opinion, the Court decided that a taxable person cannot take into account the turnover carried out by its branches established in both other Member States and in third states in order to determine the VAT deduction right of its principal establishment.

The Court added that Member States are not allowed to adopt a rule for the computation of the VAT deduction right per sector of business of a company which authorises that company to take into account the turnover realised by a branch established in another Member State or in a third State. The ECJ judges specified that the notion of “sectors of business” does not refer to geographic areas but to different forms of economic activities.

This decision was unfortunately somehow foreseeable. One of the arguments used was that, should a global pro rata be allowed, it would be distorted since there could be an increase of the VAT deduction right of the principal establishment for all the acquisitions made whereas certain acquisitions have no connection with the activities of the fixed establishment.

Via ECJ rules on computation of a 'global' pro rata.

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