July 2016

EY TAX Alert
Luxembourg

CJEU decision on
VAT recovery of
branch network
support costs

The ESET case (C-393/15) focuses on businesss ability to recover VAT on global and
branch support costs. This is an important topic, particularly for companies which
operate via a complex branch network.

Background CJEU decision

ESET, an entity established in Slovakia,
(ESET Slovakia) received services from its
Polish branch (ESET Poland). ESET Poland
provided software services which were
incorporated into products which were
marketed and sold by ESET Slovakia. ESET
Poland also made a number of occasional
supplies in Poland which carried a right to
recover VAT on related costs.
ESET Poland sought to recover local VAT it
incurred in providing its branch-to-branch
supplies, recovering VAT in full on the
basis that ESET Slovakia made only taxable
supplies. The Polish Tax Authorities rejected
ESET Polands claim on the basis that its
intra-entity flows were disregarded for VAT
purposes. Given the uncertainty on the issue,
questions were referred to the Court of
Justice of the European Union (CJEU).
Interestingly, the CJEU released its decision
via an order rather than judgment. Orders
are typically only used where the answer is
deemed to be straightforward.
The CJEU held that a taxable person located
in Member State A (e.g., Poland) which
makes supplies in another (e.g., Slovakia)
should be entitled to recover VAT on related
costs in Member State A. This right exists
even though those costs only contribute
to supplies made in a different Member
State. The CJEU also confirmed that this
right exists where those supplies, if carried
out locally, would have given rise to VAT
recovery.
In its (limited) commentary, the CJEU
confirmed that the Principal VAT Directive
takes a fairly broad approach to the concept
of economic activity and does not restrict
its scope on the basis of the activitys place
of performance.
Understanding the impact of the
decision
Whilst the CJEU may consider the matter
straightforward, there is no standard EU
practice around branch and global support
cost recovery. For example, the French
Courts decision in the Morgan Stanley case
treated related input tax as being wholly
irrecoverable whereas it is common for UK
and German companies to recover costs on a
look through basis.
Whilst ESET does support the right to recover
VAT on branch-to-branch services, it does
not discuss the level of recovery permitted.
Although its wording suggests a preference
for a look through approach which would
potentially divide the branchs activity into
support services and supplies made in its
own name, it does not elaborate on this.
It is, therefore, not clear whether the
recovery is based on:
A look through to the head offices VAT of the deduction right. Businesses in the
deduction right
The general VAT recovery right of the
branch where it makes supplies in its own
name
A geographical simulation is required:
had the branch been in the head office
Member State, it would have had or not
a VAT deduction right according to the
head offices Member State VAT rules
(approach taken by the CJCE in the
C-582/08 case)
What happens next?
Where a business has any trapped input
tax in jurisdictions where recovery is
currently denied or where credit has not
yet been taken, we suggest revisiting the
amounts at stake to determine whether
a claim is possible. Similarly, where the
business already enjoys a level of recovery
on support costs either at its own local VAT
deduction right or via a look-through VAT
deduction right we would suggest assessing
the impact of ESET to determine whether the
current approach is impacted and/or whether
a right to recover additional amounts exists.
From a Luxembourg perspective, it will also
be interesting to see how the Luxembourg
VAT Authorities will interpret and apply the
decision. Although these new rules had a
few iterations, their genesis was the CJEUs
decision in Le Credit Lyonnais (C-388/11)
which focused on the inclusion of the branch
turnover for the head office calculation
process of implementing a new partial
exemption method may also wish to consider
whether and how this case impacts their own
situations.
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