• Application of VAT Rules to Transactions between Head Office and Permanent Establishment
  • May 15, 2015 | Authors: Nicolas Andre; Siamak Mostafavi
  • Law Firm: Jones Day - Paris Office
  • For French corporation tax purposes, a French permanent establishment (PE) of a non-French tax resident corporation is treated as a separate taxable person including, generally, in its dealings with its head office. International tax treaties, signed by France, define how income and expenses (including those borne by the head offices for the purposes of the PE) should be allocated to the PE.

    For VAT purposes, the French case law generally considers that the "transactions" between a head office and its PE are not within the scope of the tax (i.e., because they take place within the same legal entity). The French tax authorities (FTA) generally follow the same approach. The European Union case law (FCE Bank, September 23, 2006) arrives at the same conclusion when the PE lacks autonomy vis-à-vis the head office. There is, also, one recent EU law case (Skandia, September 17, 2014) where it was decided that if the head office or the PE belongs to a "VAT group", then the internal dealings between the head office and the PE should be treated as in scope (NB: France has not introduced the VAT grouping in its legislation). Also, in a separate EU law case (Crédit Lyonnais, September 12, 2013), the concept of a worldwide pro-rata (i.e., a computation of the aggregate VATable activities of the head office and its PEs) was rejected.

    In a decision dated January 27, 2015, the Administrative Appeal Court of Versailles (Appeal Court) deals with the situation of a French PE (of a UK law-governed entity) with two separate activities: financial transactions with French clients where the PE has elected to be liable to VAT, and services provided to the UK head office regarding certain "equity and fixed income sales". The PE had decided to deduct the full VAT charged to it on its own expenses, whether the expenses were borne for the clients' activities or for the dealings with the head office.

    The FTA had challenged the position of the PE by taking the view that the expenses borne exclusively for the dealings with the head office may not, in principle, result in a deductible VAT, although the FTA had accepted to take into account the pro-rata of the head office (i.e., the percentage of its VATable transactions) as a reference for the VAT deduction of the PE regarding the dealings with the head office. As for the mixed expenses of the PE (i.e., borne for both clients' activities and head office's dealings), the FTA had taken the view that the related VAT was partially deductible, again based on the head office's pro-rata corrected by the VATable turnover of the PE. The bank had appealed after losing at the administrative tribunal level.

    The Appeal Court starts its reasoning by referring to the FCE Bank case law and the related conclusion that the dealings between a head office and a PE should be disregarded in the absence of autonomy of the PE. Thus, the Appeal Court observes that since the taxpayer does not argue for the autonomy of the PE vis-à-vis the UK head office, the amounts received from the latter (i.e., as remuneration for the equity and fixed income sales) may not be treated as in scope, and, accordingly (i) the VAT borne on the related exclusive expenses is not deductible, and (ii) the VAT borne on the "mixed" expenses is deductible for the pro-rata of the sum of the underlying services and goods and for the VATable activities of the PE. The Appeal Court thus confirms the FTA's position in respect of the "exclusive" expenses, adding that the latter has taken a liberal view by accepting that the PE could, nevertheless, use the pro-rata of the UK head office to obtain a partial VAT deductibility.

    In respect of the "mixed" expenses, given the Crédit Lyonnais case law, the Appeal Court takes the view that the FTA has no legal grounds to compute the VAT deductibility on the basis of the head office's pro-rata corrected by the VATable turnover of the PE. This being said, the Appeal Court observes that the PE has not been able to evidence that the method used by the FTA has resulted in less deductible VAT compared to the lawful method where such deductibility would have been computed simply on the basis of the VATable activities of the PE. Accordingly, it sides again with the FTA.