The lack of legal clarity regarding VAT recovery and deductible proportion rules applicable to a branch providing support services to its overseas head-office has led to the application of different deduction methods across the European Union (EU). On 24 January 2019, the Court of Justice of the European Union (CJEU) released a long-awaited judgment in Morgan Stanley & Co International plc (Morgan Stanley) (C-165/17). The Court opined that the French branch of a Morgan Stanley entity with its head-office in the United Kingdom should use two pro rata calculations to recover French VAT incurred. One regarding expenditure exclusively used to support of its head-office’s mixed supplies, and a second, on general costs used to support both establishment’s supplies. The significance of this judgment should not be overlooked for taxable persons active in the insurance, financial and other exempt sectors and established in more than one Member State. In this article, the author considers previous CJEU’s judgments that have contributed to shape the issue of deductible proportion in cross-border scenarios, analyses the Morgan Stanley judgment and addresses theoretical and practical difficulties that arise.
EC Tax Review