The French Tax Authorities (“FTA”) have just published comments clarifying their position with respect to recent case law governing the fate of flows between the branches (branch or head office) of a single legal entity, which are also members of a VAT group in the State in which they are established. The FTA considers international supplies of services between these branches (branch or head office) as taxable for VAT.
This position is new since, until now, the French doctrine ruled, in contradiction with EU case law that “as soon as a foreign enterprise and its French branch constitute the same legal entity, the supplies of services between them are not within the scope of VAT and as a result, are not taxable” (BOFIP BOI-TVA-CHAMP-10-10-20 §280 in its version applicable until 29 December 2021).
The French Official Bulletin of Public Finances (“BOFIP”) now provides that "the transactions that the permanent establishments not located in the Member State of the VAT group carry out with the single taxable person or acquire from the single taxable person are within the scope of VAT, even though they benefit an establishment pertaining to the same legal entity". (BOI-TVA-CHAMP-10-10-20 n°285)
The development was initiated by a judgment (ECJ, decision of 17 September 2014, C-7/13, "Skandia America Corp.") rendered under the European VAT group regime as set out in Article 11 of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. In this decision, the European Court of Justice (ECJ) ruled that the supply of services by a head office to its branch is a taxable transaction for VAT purposes provided that:
- the branch is established in a Member State of the European Union and the principal place of business is located in another State (a third country or another Member State of the European Union);
- the branch is a member of a "VAT group". The "VAT group" or group of persons is the possibility for different legally independent entities to form, under certain conditions, a single taxable person in order to exclude from the scope of VAT the transactions carried out between them. Each Member State may or may not make this option available to entities established on its territory which will be the case of France, as from 1 January 2023.
Following on from this first decision, the ECJ had extended this solution when the principal place of business, and not the branch, is a member of a VAT group in its Member State of establishment. (ECJ, decision of 11 March 2021, C-812/19 "Danske Bank A/S").
Moreover, French case law has already applied these principles in a recent decision (CE, decision of 4 November 2020, no. 435295, "Société BNP Paribas Securities Services").
In addition to the confirmation of the taxable nature of the flows in question, the FTA provides several clarifications:
An initial clarification concerns the identification and reporting obligations of the establishments that are separate from the VAT group formed. These permanent establishments not located in the Member State of the VAT group are, where applicable, subject to the identification and declaration obligations of these taxable transactions under the conditions of ordinary law. (BOI-TVA-CHAMP-10-10-20 n°285 §7)
A second clarification concerns the deductibility of the input VAT of these international operations. It is indeed confirmed that the deductibility of the input VAT on the costs incurred for their realization is assessed taking into account the nature of these operations (giving rise to a right to deduction or not) and not depending on the transactions performed by the entity receiving the services. The fact that these operations are assigned or not to the realization of taxable operations by the recipient has no impact on their deductibility. (BOI-TVA-CHAMP-10-10-20 n°285 §8)
In practice, these new rules apply to:
- Relationships between a branch and its head office, when they are established in two different EU Member States and that one at least is member of a VAT group;
- Relationships between two branches located in two different EU Member States and that at least one is member of a VAT group.
However, it is already confirmed that there is no taxable transaction between two branches located in two different EU Member States and that are not part of a VAT group, even if there head office, located in a third EU Member State is member of a VAT group in that EU Member State.
Finally, the authorities have also confirmed that, for the calculation of the wages tax, "internal services provided to the same legal entity, except when, by way of derogation, they are taxable for VAT (transactions between different States involving a member of a VAT group)" do not correspond to turnover or revenue and are not to be entered in either the numerator or the denominator of the tax liability ratio. (BOI-TPS-TS-20-30 n°110 §2). Supplies of services subject to VAT as performed between a French branch or head office to a foreign branch part of a VAT group would then have to be reported on the denominator of the ratio, as taxable turnover.
In conclusion, it should be noted that if these comments are welcome as they clarify the legal uncertainty resulting from the contradiction between the “old” doctrine and the EU and French case law relating to VAT treatment of transactions between head office and branches, where one of them is part of a VAT group, it seems to us that some points still need to be clarified, and in particular the treatment of supplies of goods. Indeed, in their comments the FTA refers to “transactions” between entities of a single taxable person and not limited to “supplies of services”, bearing in mind however that the various examples provided by the FTA in their guidelines refer to services and that the ECJ case law was related to supplies of services only.
All the comments can be found using the following link (in French only): https://bofip.impots.gouv.fr/bofip/13437-PGP.html/ACTU-2021-00316
