OPINION OF ADVOCATE GENERAL
MENGOZZI
delivered on 3 October 2018 (1)
Case C‑165/17
Morgan Stanley & Co International plc
v
Ministre de l’Économie et des Finances
(Request for a preliminary ruling from the Conseil d’État (Council of State, France))
(Reference for a preliminary ruling — VAT — Articles 17 and 19 of Directive 77/388/EEC — Articles 168, 169 and 173 to 175 of Directive 2006/112/EC — Deduction of input tax — Determination of the applicable deductible proportion — Branch of a company established in a Member State other than that of its principal establishment — Expenditure incurred by the branch used exclusively for the transactions of its principal establishment — Expenditure incurred by the branch used both for its transactions and for those of the principal establishment)
I. Introduction
1. This request for a preliminary ruling, made by the Conseil d’État (Council of State, France), concerns the interpretation of Article 17(2), (3) and (5) and Article 19(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (2) (‘the Sixth Directive’), and of Articles 168, 169 and 173 to 175 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. (3)
2. The request has been made in proceedings between the company Morgan Stanley & Co International plc (‘Morgan Stanley’) and the French tax authority concerning the deduction of the value added tax (VAT) paid by the branch of Morgan Stanley registered in France for the payment of VAT (‘the French branch’) for the purposes of transactions carried out in France, on the one hand, and services for the principal establishment located in London, United Kingdom (‘the London principal establishment’), on the other.
3. More specifically, it is apparent from the order for reference that the French branch has been the subject of two tax inspections covering, as far as VAT is concerned, the periods from 1 December 2002 to 30 April 2005 and from 1 December 2005 to 30 April 2009. (4)
4. In the course of those inspections, the French tax authority found that the French branch, a fixed establishment under the applicable rules on VAT, carried out, on the one hand, banking and financial transactions for its local clients, in respect of which — in accordance with the provisions of the Sixth Directive and of Directive 2006/112 transposed by the French Code général des impôts (General Tax Code, ‘the CGI’) (5) — it had opted to be liable to VAT, and, on the other, supplied services for the London principal establishment, in return for which it received transfers. (6) The French branch deducted all the VAT charged on the expenditure attributable to those two categories of services.
5. The French tax authority considered that the VAT charged on the acquisition of the goods and services used exclusively for the internal transactions conducted with the London principal establishment was not deductible because those transactions fell outside the scope of VAT. It did, however, allow, by way of mitigation, the deduction of a portion of the tax at issue by applying the deductible proportion applicable to the London principal establishment, subject to the exceptions to the right of deduction in force in France. With regard to the mixed expenditure of the French branch, attributable to transactions carried out both for the benefit of its own clients and with the London principal establishment, the tax authority considered that it was only partially deductible and applied the deductible proportion applicable to the London principal establishment, adjusted according to the turnover of the branch in respect of which VAT is deductible, subject to the exceptions to the right of deduction in force in France.
6. Morgan Stanley applied for discharge from the additional assessments to the VAT initially deducted, sent by the tax authority, before the tribunal administratif de Montreuil (Administrative Court, Montreuil, France), which rejected those applications. The appeal lodged against the ruling of that court was, in turn, dismissed by the cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles, France) in its judgment of 27 January 2015.
7. Ruling on the appeal on a point of law brought against that judgment, the Conseil d’État (Council of State) refers, firstly, to the solution adopted in the order of 21 June 2016, ESET (C‑393/15, not published, EU:C:2016:481) concerning the right to deduct the VAT attributable to expenditure which is incurred by a branch registered in one Member State and is used, in part, for the purposes of the taxable transactions of the permanent establishment established in another Member State.
8. Having done so, the Conseil d’État (Council of State) secondly takes the view that the rules for determining the deductible proportion of a branch in the situation of the branch of Morgan Stanley do, however, require clarification, in the light, inter alia, of the judgment of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541), even though, in the view of the Conseil d’État (Council of State), the situation at issue in that judgment was different. In this regard, the Conseil d’État (Council of State) asks, first, in relation to the expenditure borne by a branch established in one Member State which is used exclusively for transactions of its principal establishment established in another Member State, whether the provisions of the Sixth Directive and of Directive 2006/112 require the Member State in which the branch is registered to apply to that expenditure either the deductible proportion applicable in that Member State, the deductible proportion of the Member State in which the principal establishment is established, or a specific deductible proportion based on the solution adopted vis-à-vis the right of refund in the judgment of 13 July 2000, Monte Dei Paschi Di Siena (C‑136/99, EU:C:2000:408), which combines the rules applicable in the Member States in which the branch and the principal establishment are registered, with regard in particular to a possible option mechanism for imposing VAT on transactions. Second, the Conseil d’État (Council of State) asks about the rules applicable in relation to the expenditure borne by the branch which is used both for its transactions in the Member State in which it is registered and for those of its principal establishment, particularly as regards the concept of general costs and the deductible proportion.
9. In those circumstances, the Conseil d’État (Council of State) decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:
‘(1) In circumstances where expenditure of a branch established in one Member State is exclusively used for the transactions of its principal establishment established in another Member State, must the provisions of Article 17(2), (3) and (5) and Article 19(1) of the Sixth Directive …, incorporated in Articles 168, 169 and 173 to 175 of Directive 2006/112…, be interpreted to the effect that the Member State in which the branch is registered is to apply to that expenditure the branch’s deductible proportion, determined according to the transactions carried out in the Member State in which it is registered and according to the rules applicable in that State, or to apply the proportion applicable to the principal establishment, or to deduct a specific proportion combining the rules applicable in the Member States in which the branch and the principal establishment are registered, with regard in particular to a possible option mechanism for imposing [VAT] on transactions?
(2) What rules should be applied in the specific case where expenditure borne by the branch is used both for transactions in the Member State where it is registered and for transactions of the principal establishment, particularly as regards the concept of general costs and the proportion of tax deductible?’
10. Written observations on those questions were submitted by Morgan Stanley, the French and Portuguese Governments and the European Commission. Those parties presented oral argument at the hearing on 1 March 2018, with the exception of the Portuguese Government which was not represented.
II. Analysis
A. Preliminary observations
11. A number of preliminary observations must be made before examining the questions put by the referring court, in particular regarding the assumptions on the basis of which those questions have been posed.
12. First of all, it is established that the French branch is a fixed establishment for VAT purposes. In other words, this situation is different in factual terms from that at the origin of the judgment of 13 July 2000, Monte Dei Paschi Di Siena (C‑136/99, EU:C:2000:408, paragraph 15), to which the national court refers. In that case, the French representative office of the Italian bank Monte Dei Paschi di Siena did not constitute such a fixed establishment in France, which therefore meant that only the provisions of the Sixth Directive and those of the Eighth Directive (7) on the refund of VAT paid in France were applicable. In the present case, the only relevant question and the sole issue raised in the request for a preliminary ruling made to the Court concerns the right to deduct VAT sought by the French branch, as a fixed establishment of Morgan Stanley. I am, however, keen to point out at this stage that, leaving aside that factual difference, the lessons which may be learned from the judgment of 13 July 2000, Monte Dei Paschi Di Siena (C‑136/99, EU:C:2000:408) are most helpful, as I will discuss later, with regard to the right to deduct VAT, since the principles governing that right and the refund of VAT are identical. (8)
13. Next, despite the fact that the French branch opted for liability to VAT in France on its banking and financial activity, in accordance with the option provided for in the first paragraph of Article 13(C) of the Sixth Directive and in Article 137(1) of Directive 2006/112, both of which were transposed into the CGI, neither the referring court nor the parties who participated in the procedure before the Court have brought to light factors on the basis of which the view may be taken that that fixed establishment enjoys complete autonomy from the London permanent establishment such that the French branch assumes the risk associated with the economic activity which it carries out. As the Portuguese Government observed, it is therefore reasonable to assume that the French branch is not, as such, a ‘taxable person’ within the meaning of Article 4(1) of the Sixth Directive and the first subparagraph of Article 9(1) of Directive 2006/112, that is to say that, unlike the subsidiary of a company, it does not satisfy the condition of carrying out an economic activity ‘independently’, whatever the purpose or results of that activity. (9) However, such an independent economic activity is carried out by the entity formed of the French branch together with the London principal establishment, such that — in accordance with the case-law of the Court — it is that entity which must be regarded as a single taxable person for the purposes of interpreting the rules on VAT. (10) The parties who submitted observations in the present case agree with the foregoing. However, that case-law does not explicitly concern the right to deduct VAT and cannot therefore form a starting point for the line of reasoning which must be followed in the present case.
14. Lastly, in view of that fact, I am moved to make two final preliminary remarks, both of which relate to the delimitation of the questions put by the referring court.
15. Firstly, it is important to note that the referring court is not asking the Court about the right to deduct the VAT charged on the expenditure incurred by the French branch which is exclusively used for or contributes to the output banking and financial transactions carried out for the benefit of its French clients, in respect of which the option of liability to VAT referred to above was exercised. As the Commission observed at the hearing, this issue does not form part of the subject matter of the proceedings before the French courts since the tax authority has — it would appear — never called into question the right to deduct in full the input VAT charged on such expenditure. This fact should be noted. Although I will not give any further consideration to the tax treatment of such expenditure incurred by the French branch, the fact remains that it is the very existence of such transactions in respect of which VAT is deductible in France, by virtue of the option exercised by the French branch, which forms the basis of a large share of the claims made by Morgan Stanley, which is seeking to deduct in full the VAT charged on all the other expenditure incurred by that branch. In Morgan Stanley’s view, it is solely in the light of the banking and financial transactions carried out by its branch in French that the company considers that it is eligible to benefit from the deduction in full of the VAT charged, on the one hand, on the expenditure incurred by the French branch used exclusively for transactions of the London principal establishment (which forms the subject matter of the first question referred for a preliminary ruling) and, on the other, on the ‘mixed’ expenditure, namely that used for transactions both of that branch and of the principal establishment (which forms the subject matter of the second question referred for a preliminary ruling).
16. Secondly, with regard to those questions, and as Morgan Stanley, the French Government and the Commission have observed, I note that the Conseil d’État (Council of State) has not expressly asked the Court about the interpretation adopted by the cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles) to the effect that, since the French branch cannot be regarded as a ‘taxable person’, (11) the expenditure incurred by that branch exclusively for the benefit of the London principal establishment was not used for transactions falling within the scope of VAT and cannot therefore give rise to a right to deduct input VAT. (12)
17. In this regard, as I observed in point 7 of this Opinion, the referring court simply refers, in the statement of grounds of the request for a preliminary ruling, to the order of 21 June 2016, ESET (C‑393/15, not published, EU:C:2016:481), from which it may clearly be inferred, in my view, that the interpretation adopted by the cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles) — namely that internal transactions between a branch and its principal establishment preclude, as such, the deduction of the VAT charged on the expenditure incurred by the branch for the benefit of its principal establishment — must be rejected. In that order, the Court ruled that Articles 168 and 169(a) of Directive 2006/112 — which, I would point out, both concern the ‘origin and scope of the right of deduction’ — must be interpreted as meaning ‘that a branch registered in one Member State for the payment of [VAT] for a company established in another Member State and which mainly carries out internal transactions not subject to that tax for that company, but also occasionally transactions taxed in the Member State where it is registered, is entitled to deduct input [VAT] in the latter State charged on goods and services used for the needs of that company’s taxable transactions carried out in the Member State where the branch is established’. (13) In other words, the existence of internal transactions or flows of funds between the branch registered in one Member State and the principal establishment located in another Member State does not mean, in principle, that the single taxable person formed of those two entities may be refused the right to deduct input VAT charged on the expenditure incurred by the branch for the benefit of the taxable transactions carried out by the principal establishment. Such flows of funds relate to the economic activity of one and the same taxable person; since they are not effected for consideration, there is therefore no transaction. If there is no transaction, there can be, by definition, no transaction falling outside the scope of VAT.
18. It is true that there are differences between the present case and the case which gave rise to the order of 21 June 2016, ESET (C‑393/15, not published, EU:C:2016:481), since whereas in the case which gave rise to that order all the output transactions carried out by the principal establishment were — to all appearances — taxable, in the present case the referring court’s focus on the deductible proportion means, by definition, that there are both output economic transactions in respect of which VAT is deductible and some in respect of which it is not. (14) However, at this stage of my analysis, I would observe that, by not expressly seeking further clarification vis-à-vis the lack of impact (or the neutral effect) of internal flows of funds between a branch and its principal establishment on the existence and scope of the right to deduct the VAT charged on the expenditure incurred by the branch for the benefit of the principal establishment, the Conseil d’État (Council of State) appears to be working on the assumption that the order of 21 June 2016, ESET (C‑393/15, not published, EU:C:2016:481) forms a sufficient basis to declare the interpretation adopted by the cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles) to be unlawful.
19. The answers to the questions referred could therefore conceivably be confined to the interpretation of Articles 17(5) and 19(1) of the Sixth Directive and Articles 173 to 175 of Directive 2006/112, which lay down the rules on the deductible proportion.
20. There are, however, two main reasons why I propose that the Court’s response should not be restricted in that way.
21. Firstly, I note that, in its first question referred for a preliminary ruling, the Conseil d’État (Council of State) makes reference not only to the provisions of the Sixth Directive and Directive 2006/112 on the deductible proportion, but also to Article 17(2) and (3) of the Sixth Directive and Articles 168 and 169 of Directive 2006/112 which govern the ‘origin and scope of the right of deduction’. The referring court therefore appears implicitly to be seeking confirmation of the interpretation of the latter provisions adopted by the Court in the order of 21 June 2016, ESET (C‑393/15, not published, EU:C:2016:481).
22. Secondly, it is clear from the hearing held before the Court that the parties to the proceedings draw different legal inferences from the neutral nature of the internal flows of funds between the branch and the principal establishment as regards the scope of the right to deduct input VAT, in particular vis-à-vis determining which output transactions with third parties must be taken into account. Whereas Morgan Stanley essentially takes the view that the lack of impact of the internal flows of funds between the branch and the principal establishment on the scope of the right to deduct input VAT means that the only relevant transactions with third parties are those carried out by the French branch, meaning that that branch must be allowed to deduct the VAT paid in full, the French and Portuguese Governments and the Commission take the opposing view. In the view of the latter parties concerned, the lack of impact of such internal flows of funds on the right to deduct VAT means that the output transactions carried out by the London principal establishment with third parties, for which the expenditure incurred by the French branch is used, must also be taken into account to determine the scope of the right to deduct the VAT charged on the expenditure of that branch, which in turn entails a more nuanced approach (than that proposed by Morgan Stanley) as regards the deductible input VAT.
23. It is therefore my view that, in order to be entirely useful, the response to the request for a preliminary ruling must include considerations concerning the scope of the taxable person’s right of deduction in a situation such as that at the origin of the present case, since such considerations should also make it easier to provide the answer to be given vis-à-vis the applicable deductible proportion, as the Commission has also argued, in essence, in its observations.
24. I will now consider the questions put by the referring court, it being understood that the first of those questions is the most difficult.
B. The first question
25. I note that, by its first question, the referring court seeks an interpretation of the provisions of Articles 17(2), (3) and (5) and Article 19(1) of the Sixth Directive, which are reproduced in Articles 168, 169 and 173 to 175 of Directive 2006/112. More specifically, the referring court asks whether those provisions mean that the Member State in which a branch is registered must apply to the expenditure exclusively incurred by that branch for transactions carried out by the principal establishment, which is located in another Member State, (a) a deductible proportion determined solely according to the transactions carried out by that branch in the Member State in which it is registered and in accordance with the rules applicable in that Member State; (b) a deductible proportion in accordance with the rules applicable in the Member State in which the principal establishment is located; or (c) a ‘specific’ deductible proportion combining the rules applicable in each of the Member States concerned, having regard in particular to ‘a possible option mechanism’ governing the liability of transactions to VAT.
26. Whilst Morgan Stanley submits that interpretation of the abovementioned provisions means that alternative (a) set out in the preceding point of this Opinion must be adopted, the other parties concerned are of the view that the correct interpretation of those provisions means that account must be taken of the output transactions carried out by the principal establishment and that alternative (c) must be adopted.
27. As the parties to the proceedings have rightly pointed out, the fact that the expenditure of the French branch is used exclusively for output transactions of the London principal establishment gives no indication whatsoever of the scope of the right of deduction in the Member State in which the branch is registered. That right is dependent on the liability to VAT of the output transactions, according to whether those transactions are, systematically, taxable or exempt. In the circumstances of the present case, those transactions are also carried out in a Member State other than that in which the expenditure was incurred and where the deduction is sought, which — as I will set out below — inevitably brings into play Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112.
28. In the light of those factors, I will address three points with a view to providing a useful answer to the first question. First of all, I will reiterate the principles governing the scope of the right of deduction, within the context of interpreting Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112, which alone will provide some guidance as to how the first question should be answered (Section 1). Next, I will address the specific difficulty of determining the deductible proportion applicable in the Member State in which the branch is registered, having regard in particular to the scope of the judgment of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541), upon which each of the parties concerned relies in support of their diametrically opposed arguments (Section 2). Finally, I will give some consideration to the issue of the impact of a ‘possible option mechanism’, to which reference is made at the end of the first question put by the referring court (Section 3).
1. The origin and scope of the right of deduction and the interpretation of Article 17(3)(a) of the Sixth Directive and of Article 169(a) of Directive 2006/112
29. The right to deduct input VAT varies according to the intended use of the goods and services at issue. (15)
30. Firstly, under Article 17(2) of the Sixth Directive and Article 168(a) of the VAT Directive, when a taxable person acquires goods or services intended exclusively to carry out taxable output transactions, that person is entitled to deduct all the VAT charged on the acquisition of those goods or services.
31. In accordance with Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112, that logic of the system of deducting input VAT likewise applies in cases where the goods or services at issue are used for the purposes of output economic transactions carried out outside the Member State in which the VAT is due or paid, in respect of which VAT would be deductible if they had been carried out within that Member State. (16)
32. In the same vein, as I have already mentioned, in the order of 21 June 2016, ESET (C‑393/15, not published, EU:C:2016:481), the Court ruled that the right to deduct VAT, which follows from the application of Articles 168 and 169(a) of Directive 2006/112, had to be granted to the Polish branch of a Slovak company which mainly carried out internal transactions not subject to VAT for that company, but also occasionally transactions taxed in Poland, where tax is charged on the goods and services used for the purposes of that company’s taxable transactions carried out in Slovakia.
33. Thus, in accordance with the spirit and purpose of the system of VAT, (17) the branch must therefore be eligible for relief from the burden of the VAT charged on the expenditure incurred to acquire input goods or services, since such expenditure is a component of the cost of the taxable output transactions which give rise to the right of deduction, (18) even where the latter transactions are carried out in the Member State of the taxable person’s principal establishment, provided that — in accordance with Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112 — those transactions would have given rise to that right of deduction if they had been carried out in the Member State in which the branch is registered.
34. Subject to satisfaction of that last condition, VAT must be deductible where the input goods and services acquired have a direct and immediate link with the output transactions giving rise to a right of deduction. (19)
35. As the Commission rightly pointed out in its observations and as is clear from the order of 21 June 2016, ESET (C‑393/15, not published, EU:C:2016:481, paragraphs 40 and 41), the objective of those provisions of the Sixth Directive and Directive 2006/112 is to prevent the right of deduction which may be claimed by a taxable person in a Member State from being restricted to purely internal situations only, by extending the benefit of that right where the taxable person carries out its activities in the territory of several Member States.
36. There can therefore be no doubt that Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112 extend the territorial scope of the right of deduction, by taking into account the output transactions carried out outside the Member State within the territory of which the benefit of the right of deduction is claimed.
37. The question is, however, raised whether the articles cited above may be interpreted as also extending the material scope of such a right.
38. Whilst Article 17(2) of the Sixth Directive and Article 168 of Directive 2006/112 do entitle a taxable person to deduct VAT in respect of ‘the goods and services used for the purposes of his taxable transactions’ in a single Member State, Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112 supplement that right by affording the deduction to the taxable person in so far as the goods and services are used for the purposes of ‘his’ economic ‘transactions’ carried out in another Member State (provided that they would have been deductible in the Member State in which VAT is due or paid), and not only his ‘taxable transactions’.
39. A broad interpretation of Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112 would gloss over the need to draw a clear distinction between the types of expenditure incurred in a Member State according to whether they are used for taxable or exempt output transactions in another Member State. Adopting such an approach would ultimately mean that the scope of the right to deduct input VAT would be dependent solely on whether the input economic transactions at issue would have been deductible if they had been carried out in the Member State in which the output expenditure was incurred.
40. Although that issue did not emerge clearly at the hearing before the Court, it could nevertheless be of some importance in the main proceedings and an answer must be found to it. As I have already mentioned, Morgan Stanley opted for liability to VAT in France in respect of its banking and financial transactions carried out in that Member State. Accordingly, adopting the interpretation of Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112 set out in the two preceding points of this Opinion could mean that it is irrelevant whether or not the expenditure of the French branch, which was used for the banking and financial transactions of the London principal establishment, is used for exempt or taxable transactions in the United Kingdom since, ultimately, the same type of transactions would have been deductible if they had been carried out by the French branch in France by virtue of the option exercised by that branch.
41. Notwithstanding the factual assumptions on which the line of reasoning set out above is based, (20) I would point out that the Court has not, however, adopted that interpretation of the articles of the two VAT directives cited above.
42. Thus, it is apparent from the judgment of 13 July 2000, Monte Dei Paschi Di Siena (C‑136/99, EU:C:2000:408, paragraphs 27 and 28) that the Court by no means intended to dispense with the need to identify the use of the output transactions, according to whether they are taxable or exempt in the Member State in which they are carried out, in order to focus solely on whether all those transactions would have given rise to a right to deduct VAT in the Member State in which the refund (or the deduction) was claimed. Indeed, the Court made clear that the application of Article 17(3)(a) of the Sixth Directive meant, in that case, that, ‘in the case of a taxable person carrying out taxed transactions and exempt transactions in the Member State where he is established, it is appropriate to consider whether the former transactions would also give rise to a right of deduction in the Member State of refund in the event of their being carried out there’. (21)
43. In other words, in a situation such as that in the present case, the first stage of the reasoning — which consists in identifying to which type of transactions (deductible or non-deductible), carried out in the Member State in which the principal establishment is located, the output expenditure relates — is necessary in all circumstances. It is only where those transactions are deductible in that Member State that the second stage — which concerns whether such transactions would likewise have given rise to a right of deduction if they had been carried out in the Member State in which the branch is registered — comes into play.
44. It also follows that if the input expenditure is used for transactions of the principal establishment which are wholly exempt in the Member State in which that principal establishment is located, the deduction may be refused entirely without it being necessary to ascertain whether those transactions would have given rise to a right of deduction in the Member State in which the branch is located.
45. That interpretation of Article 17(3)(a) of the Sixth Directive was confirmed in the judgment of 22 December 2010, RBS Deutschland Holdings (C‑277/09, EU:C:2010:810, paragraphs 36 and 37). In that judgment, the Court in fact ruled out the right to deduct the input VAT borne in one Member State in order to carry out output transactions in another Member State only where the latter transactions would have been exempt from VAT in the latter Member State, (22) regardless of whether those transactions would have given rise to a right of deduction in the first Member State if they had been carried out there.
46. This approach is consistent, at the very least, with the need to establish — in order to grant a right to deduct input VAT — the existence in principle of a direct and immediate link between the acquisition of input goods or services by the taxable person and his output transactions giving rise to a right of deduction.
47. Similarly, not restricting the right of deduction which may be claimed by a taxable person in a Member State to purely internal situations only, by extending the benefit of that right where the taxable person carries out its activities in the territory of several Member States, is consistent with the principle of neutrality which guides the interpretation of the rules governing the system of VAT.
48. It is true that Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112 lay down an additional requirement, namely that the right of deduction may be refused by the Member State in which the benefit of the deduction is sought if the output transactions of the taxable person — which give rise to a right of deduction in the Member State in which they are carried out — would not, however, give rise to such a right in the first Member State if they had been carried out there. (23)
49. That additional requirement expresses, in my view, the need to strike a balance between, on the one hand, the principle of the neutrality of VAT and, on the other, the rational allocation of the spheres of application of Member States’ legislation in VAT matters (24) and the principle of equal treatment. Although, under the first principle, a taxable person who carries out his activities in the territory of several Member States cannot — simply by virtue of that fact — be refused the right to deduct input VAT, the fact remains that that taxable person cannot benefit, in the Member State in which he seeks to deduct VAT, under the tax legislation of that Member State, from more favourable treatment than those taxable persons who carry out all their economic activities in the territory of that same Member State.
50. Similar principles guide the interpretation of Article 17(5) of the Sixth Directive and Article 173(1) of Directive 2006/112, which lay down the rules applicable to the right of deduction where the taxable person uses goods or services to carry out both transactions in respect of which VAT is deductible — referred to, respectively, in Article 17(2) and (3) of the Sixth Directive and Articles 168 and 169 of Directive 2006/112 — and transactions in respect of which it is not.
51. In such circumstances, only such proportion of the VAT is deductible as is attributable to the former taxable transactions, and the right of deduction is quantified according to a proportion fixed in accordance with Article 19 of the Sixth Directive and Articles 174 and 175 of Directive 2006/112. (25)
52. The reference, in Article 17(5) of the Sixth Directive to Article 17(2) and (3) of that directive and in Article 173(1) of Directive 2006/112 to Articles 168 and 169 of that directive, lays down the further requirement, in principle, to examine the category of transactions — namely those which give rise to a right of deduction and those which do not — for which the input expenditure incurred by a taxable person and in respect of which that taxable person paid VAT is used in order to determine the scope of the right of deduction enjoyed by the taxable person, including where the transactions at issue are carried out in another Member State. In such a situation, the scope of the right of deduction will depend, proportionally, on the use of the input expenditure incurred by the taxable person for his deductible output transactions, provided that those transactions would also give rise to a right of deduction in the Member State in which VAT is due or paid if they had been carried out there, that is to say, in principle, in the Member State within the territory of which the expenditure on which VAT has been charged was incurred. (26)
53. What initial lessons can be drawn for the present case from this — relatively general — reminder of the principles which guide the scope of the right to deduct VAT?
54. First of all, as Morgan Stanley has argued and, moreover, as the French Government and the Commission have acknowledged, the deduction of VAT sought by the French branch in respect of the expenditure it incurred exclusively for transactions of the London principal establishment cannot be refused, in principle, simply by virtue of the fact that those transactions give rise to internal payments between those two entities of the single taxable person. Those payments are neutral or ‘transparent’, to adopt the term used by the French Government, and such refusal would, to the referring court’s understanding, be at odds with the order of 21 June 2016, ESET (C‑393/15, not published, EU:C:2016:481).
55. Next, in the light of Article 17(2), (3)(a) and (5) of the Sixth Directive and Articles 168, 169(a) and 173 of Directive 2006/112 and since it is established that the first question referred for a preliminary ruling concerns only the treatment for VAT purposes of the expenditure incurred by the French branch which is used exclusively to carry out output transactions of the London principal establishment, I see no reason which would justify not taking into account such transactions, carried out with third parties, with a view to determining the scope of the right of deduction enjoyed by the taxable person in France through the French branch.
56. The argument, advanced by Morgan Stanley, that the only transactions with third parties which have to be taken into consideration in order to determine the scope of the right of deduction enjoyed by the taxable person are those that the French branch carries out with its own clients is therefore flawed in several respects. That approach in fact confuses ‘the taxable person’, as defined in the Sixth Directive and Directive 2006/112, with the branch, even though — as I have already stated — the branch is merely one component of the single taxable person formed by that branch together with the principal establishment. It also misconstrues the scope of Article 17(2), (3)(a) and (5) of the Sixth Directive and Articles 168, 169(a) and 173 of Directive 2006/112 and fails to draw the correct conclusions from those provisions, since — I reiterate — the expenditure at issue is not input expenditure on which VAT has been charged and which is used exclusively for output transactions of the French branch, (27) but rather input expenditure on which VAT has been charged and which is used exclusively for output transactions carried out by the principal establishment of the taxable person.
57. Lastly, the approach set out above cannot be refuted on the basis of the territoriality of the rules on the calculation of the deductible proportion, upon which Morgan Stanley relies, invoking the judgment of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541). At this stage, I will simply observe, without denying the importance — in particular the practical importance — of those rules, that they cannot alter the content or the scope of the provisions of the Sixth Directive and Directive 2006/112 cited above, which govern the origin and scope of the right of deduction. In addition, under those provisions, in order to determine the scope of the right of deduction, it is necessary, first and foremost, for the taxable person to assign the input goods and services to the various output transactions which have been carried out and for the performance of which they were intended. (28) Since, in the main proceedings, the first question referred for a preliminary ruling takes as a starting point the fact that some of the expenditure of the French branch was used exclusively to provide services for the benefit of the London principal establishment, those transactions — carried out by the taxable person with third parties — must necessarily be taken into account in order to determine the scope of the right to deduct input VAT.
58. As I have already stated, the fact that some of the input expenditure of the branch of the taxable person, expenditure on which VAT was charged, is used exclusively for transactions of the principal establishment of that taxable person carried out with third parties does not, however, give any indication of the scope of the right of deduction. The scope of that right in fact depends on whether all those transactions are transactions in respect of which VAT is deductible, within the meaning of Article 17(2) and 3(a) of the Sixth Directive and of Articles 168 and 169(a) of Directive 2006/112, or whether only some of those transactions give rise to such a right of deduction.
59. As the Commission has argued, if all the output transactions carried out by the London principal establishment of the taxable person and for which the expenditure of the French branch is used are taxable transactions, the right to deduct VAT in full should be granted, provided — as is made clear in Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112 — that such transactions would have been deductible in the Member State in which the VAT is due, that is to say France, the Member State in which that branch is registered, if they had been carried out there. Conversely, no right of deduction will be granted if the input expenditure contributes to exempt output transactions only (29) or does not fall within the scope of VAT.
60. However, if the expenditure of the branch is used both for transactions of the principal establishment in respect of which the input VAT is deductible and for others which do not give rise to such a right, the deduction will be partial, in proportion to those transactions giving rise to a right of deduction only, in accordance with Articles 17(5) and 19(1) of the Sixth Directive and Articles 173 to 175 of Directive 2006/112, subject to the condition laid down in Article 17(3)(a) of the Sixth Directive and in Article 169(a) of Directive 2006/112 also being satisfied.
61. I observe, in this regard, that the referring court has not specified whether all or only some of the transactions carried out by the London principal establishment give rise to a right to deduct input VAT. However, in so far as it asks the Court about the rules on the deductible proportion, it must be assumed that, at the very least, some of the transactions of the principal establishment to which the expenditure incurred by the French branch is linked do not afford such a right.
2. The deductible proportion
62. As I have previously pointed out, the rules laid down in Article 17(5) of the Sixth Directive and in Article 173(1) of Directive 2006/112 concern input VAT charged on expenditure linked exclusively to output economic transactions, in respect of which VAT is deductible in some cases and not in others because they benefit from an exemption.
63. In such circumstances, since only the share of VAT proportionate to the amount of the first category of taxable transactions is deductible, a deductible proportion must be calculated for all the transactions carried out by the taxable person. In accordance with Article 19(1) of the Sixth Directive and Articles 173(1) and 174(1) of Directive 2006/112, that proportion is determined, in principle, by applying a turnover-based allocation key. (30) Those provisions state that that proportion is to be made up of a fraction comprising, as the numerator, the total amount of turnover for the year, exclusive of VAT, attributable to transactions in respect of which VAT is deductible and, as the denominator, the total amount of turnover for the year, exclusive of VAT, of all the taxable person’s transactions.
64. In this regard, in support of its argument that only the deductible proportion of the Member State in which the branch is registered has to be taken into consideration, Morgan Stanley relies on the judgment of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541), which rejected the ‘global proportion’ solution, that is to say the possibility of the principal establishment of a company, which is located in one Member State and has incurred expenditure to benefit the output transactions of the branches of that same company which are registered in other Member States, taking into account, when calculating the abovementioned fraction, the total amount of the turnover achieved both by the principal establishment and by all those branches.
65. Morgan Stanley’s reading of the judgment of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541) is, in my opinion, incorrect because, although I concede that that judgment does contain certain ambiguities, Morgan Stanley draws conclusions from it of such a general nature that they ultimately distort the scope of the judgment.
66. First and foremost, I observe that, in answering the first question which had been referred to it for a preliminary ruling, in paragraph 34 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541), the Court inferred from the fact that the principal establishment of a company located in one Member State and the fixed establishment (the branch) of that company located in another Member State ‘constitute a single taxable person subject to VAT’ that that taxable person ‘is subject, in addition to the system which applies in the [Member] State of its principal establishment, to as many national systems of deduction as there are Member States in which it has fixed establishments’. (31)
67. In paragraph 35 of that same judgment, the Court continued its line of reasoning by stating that, ‘since the methods of calculation of the proportion constitute a fundamental element of the deduction system, account cannot be taken, in calculating the proportion applicable to the principal establishment of a taxpayer established in a Member State, of the turnover of all the taxable person’s fixed establishments [branches] in the other Member States, without seriously jeopardising both the rational allocation of the spheres of application of national legislation in VAT matters and the rationale of the aforesaid proportion’. (32)
68. In the view of the Court, that approach is consistent with, or at least not contrary to, the principle of the neutrality of VAT since, referring to points 67 to 69 of the Opinion of the Advocate General delivered in that case, (33) the Court finds that ‘it is not proved that allowing a taxable person to calculate the deductible proportion applicable to its principal establishment in a certain Member State by taking into account the turnover of its fixed establishments in the other Member States can guarantee, in all cases, better observance of that principle than a system which provides that a taxable person must, in every Member State in which he can be regarded as having a fixed establishment within the meaning of the Sixth Directive, determine a separate deductible amount’. (34)
69. In paragraph 38 of the judgment, the Court added that such a method of determining the deductible proportion applicable to a taxable person’s principal establishment would serve to increase, in relation to all the acquisitions which that taxable person carried out in the Member State in which its principal establishment is situated, the proportion of VAT which that principal establishment may deduct, even though some of those acquisitions have no connection with the activities of the fixed establishments outside that [Member] State. Thus, the amount of the applicable deductible proportion would be distorted’. (35)
70. In addition, firstly, it is clear from those grounds of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541) alone that the Court rejected the general argument which had been advanced by that company that, in essence, the principle of neutrality required that a global proportion applicable to a taxable person’s principal establishment be established, taking into account the turnover of all the branches of that taxable person located in Member States other than that of its principal establishment.
71. Indeed, as Advocate General Cruz Villalón observed in point 68 of his Opinion — to which the Court referred in paragraph 37 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541) ‐ the purpose of the argument advanced by the company Le Crédit Lyonnais was ‘to ask the Court to define, in general terms, the theoretical principles which must govern the determination of the deductible proportion in the case of a company which has its principal establishment in one Member State which centralises expenditure used, inter alia, for transactions carried out by its branches in other Member States, without providing any precise figures relating either to the overall amount of that common expenditure or the proportion of the taxable transactions effected by the branches using that expenditure, or the slightest indication of the direct and immediate link required by the case-law of the Court between the input expenditure made by the principal establishment and the output transactions carried out by the branches in respect of which VAT is deductible’. (36)
72. The global proportion argument, such as that advanced by Le Crédit Lyonnais, was therefore at odds, inter alia, with the requirement restated above in points 34 and 46 of this Opinion that, for VAT to be deductible, there must, in principle, be a direct and immediate link between the input goods and services and one or more output transactions in respect of which VAT is deductible. (37) Furthermore, the Court explicitly reiterated that case-law in paragraph 38 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541), stating that the solution advocated by Le Crédit Lyonnais would have meant that the taxable person’s principal establishment would have been allowed to deduct the input VAT charged on its expenditure even though some of that expenditure had ‘no connection with the activities of the fixed establishments outside that [Member] State’, which, quite clearly, would have distorted the amount of the applicable deductible proportion.
73. Secondly, none of the grounds, cited above, of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541), summarised in points 66 to 69 of this Opinion, states that only the rules on the deductible proportion applicable to the taxable person’s principal establishment were to be applied to the situation examined in that judgment.
74. On the contrary, as the French Government and the Commission rightly pointed out in their observations in the present case, paragraph 34 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541) counters the argument that a single set of rules governing the deductible proportion should be applied, stating that the single taxable person formed by the principal establishment and the branch ‘is subject, in addition to the system which applies in the [Member] State of its principal establishment, to as many national systems of deduction as there are Member States in which it has fixed establishments’. (38) Furthermore, paragraph 37 of the same judgment supports that interpretation, explaining that a taxable person which has a fixed establishment in a Member State other than that of its principal establishment must determine a ‘separate’ deductible proportion for that fixed establishment.
75. It is true that, in its answer to the third question which had been referred to it in the case of Le Crédit Lyonnais (C‑388/11, EU:C:2013:541), the Court found, in paragraph 55 of that judgment, that a Member State cannot, on the basis of the provisions of the third subparagraph of Article 17(5) of the Sixth Directive, permit a taxable person established on its territory to take into account, when determining the deductible proportion applicable to a sector of its economic activity, the turnover of a fixed establishment which is established outside that Member State’. (39)
76. Further to the questions put by the Court and at the hearing before the Court, Morgan Stanley relied on the use, in the singular, of the expression ‘fixed establishment’, seeking to infer from its use that paragraph 55 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541) supported its view that only the deductible proportion applicable to the French branch was to be taken into account, on the basis of the transactions carried out exclusively by that branch for the benefit of its clients and therefore excluding the transactions carried out for the benefit of third parties by the London principal establishment.
77. Although I do not deny that the wording of paragraph 55 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541) does, in the particular context of that judgment, contain ambiguities, I do not take the view that it should be afforded the scope which Morgan Stanley appears to read into it. In any event, it cannot be construed as invalidating my findings above vis-à-vis paragraphs 34 to 38 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541).
78. Indeed, in the third question put to the Court in that case, the national court asked whether, in particular, the answer to be given to the first question — to which the Court responded in paragraphs 34 to 38 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541) — might vary from one Member State to another, depending on the options made available by the third subparagraph of Article 17(5) of the Sixth Directive, with regard to the establishment of different sectors of business. (40)
79. The Court therefore answered that question in the negative. In that connection, it attached great importance to the wording of the option afforded to the Member States by points (a) and (b) of the third subparagraph of Article 17(5) of the Sixth Directive, namely the possibility of authorising or compelling ‘the taxable person to determine a proportion for each sector of his business’, by ruling out, in paragraph 53 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541), the interpretation of the expression ‘sectors of business’ as referring to ‘geographic areas’.
80. In other words, what is impossible under the rule governing the calculation of the deductible proportion laid down in the first and second subparagraphs of Article 17(5) of the Sixth Directive because there is no direct and immediate link between the expenditure incurred by the taxable person’s principal establishment, located in one Member State, and the output transactions of all its branches in the other Member States cannot be allowed under the option afforded to the Member States of determining the calculation of the deductible proportion according to sectors of business, in accordance with the third subparagraph of Article 17(5) of the Sixth Directive.
81. Moreover, both the global proportion argument and the argument advanced by Morgan Stanley are incompatible with Articles 17(2), (3) and (5) of the Sixth Directive and Articles 168, 169 and 173 of Directive 2006/112, as interpreted above in Section 2 of this Opinion. In particular, contrary to the principles stemming from the provisions of the articles cited above, both arguments result in account being taken, for the purposes of deducting VAT, of acquisitions of goods or services which have no direct and immediate link with the output transactions in respect of which VAT is deductible, and tend to ignore the economic reality of the situations at issue. It is, however, a well-established fact that the consideration of economic realities is a fundamental criterion for the application of the common system of VAT. (41)
82. Paragraph 55 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541) cannot therefore be construed as Morgan Stanley claims.
83. It follows that, as the French Government and the Commission have argued in the present case, the only acceptable solution involves the combination of the rules governing the applicable deductible proportions in, on the one hand, the Member State in which the branch is registered, and, on the other, the Member State of the taxable person’s principal establishment, that is to say the third alternative suggested in the first question referred for a preliminary ruling.
84. The logic behind that approach, which could already — at the very least implicitly — be inferred from the judgment of 13 July 2000, Monte Dei Paschi Di Siena (C‑136/99, EU:C:2000:408, paragraphs 24 to 28) — follows not only from paragraphs 34 and 37 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541) but also from the order of 21 June 2016, ESET (C‑393/15, not published, EU:C:2016:481).
85. The combined application of the rules on the deductible proportion of the Member State of the branch and that of the principal establishment of the taxable person ensures, in my view, that the optimum balance is struck between the requirement of VAT neutrality and the principle of territoriality. As regards the latter principle, it should be observed, in accordance with Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112, even if an output transaction would give rise to a right of deduction in the Member State of the taxable person’s principal establishment, the deduction will be granted only if that transaction would likewise have given rise to a right of deduction in the Member State in which the benefit of the deduction is claimed, that is to say the Member State in which the branch of that taxable person is located.
86. Although this point has not been emphasised by any of the parties to the proceedings, it is true that applying such a solution may prove complex, not least because it requires that joint consideration be given to two sets of tax legislation. It is also true that, in support of its interpretation of the provisions of the common system of VAT, the Court does sometimes point to the importance of ensuring legal certainty and the correct and coherent application of the provisions of the Sixth Directive and of Directive 2006/112, (42) in particular the simplified application of the rules on deductions and the accurate and reliable collection of VAT. (43)
87. Without dismissing those difficulties, they do not appear to me to be so extensive that they would call into question the solution of adopting a combined application of the rules on the deductible proportion, as that solution follows from the interpretation of Article 17(2), (3)(a) and (5) and Article 19(1) of the Sixth Directive and Articles 168, 169(a) and 173 to 175 of Directive 2006/112.
88. As for the legal certainty of the taxable person, I would observe that the combined application of the rules governing the deductible proportion of VAT in the Member State in which the branch is registered and the Member State in which the taxable person’s principal establishment is located is ultimately the result of the choice made by the taxable person to operate in Member States other than that of its principal establishment via fixed establishments rather than by creating subsidiaries. (44) That choice, which is not necessarily motivated solely by tax considerations, may indeed entail additional costs for the taxable person and require familiarity with the rules on deduction of two Member States. It does not, however, follow that those rules are unforeseeable.
89. With regard to the potential difficulties faced by the tax authorities of the Member States in obtaining and verifying the relevant data, I note that various instruments of administrative cooperation are at their disposal, including the exchange of information, with a view, inter alia, to contributing to ensuring the correct and reliable collection of VAT. (45)
90. In conclusion on this matter, I consider it appropriate, in the light of the hearing held before the Court, to make a number of observations on the calculation of the deduction, as it follows from a combined application of the rules of the Member State in which the branch is registered and those of the Member State in which the taxable person’s principal establishment is located.
91. Without going into details falling outside the jurisdiction of the Court within the context of a reference for a preliminary ruling, (46) I will simply state that that calculation will have to be based on the principle of the assignment of expenditure to transactions carried out by the principal establishment with third parties.
92. Accordingly, first and foremost, the expenditure assigned exclusively to taxable transactions of the principal establishment must give rise to a right of deduction in full, provided that it gave rise to a right of deduction in the Member State in which the deduction of VAT is sought, pursuant to Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112.
93. Next, the expenditure used exclusively for exempt transactions cannot give rise to any right of deduction. (47) Both the French and Portuguese Governments and the Commission are in agreement in this regard in their answers to the question requiring a written response put by the Court.
94. Lastly, in the case of mixed use, a deductible proportion will have to be determined according to the applicable rules in the Member State of the principal establishment, it being understood that the proportion of transactions giving rise to a right of deduction will mean that VAT is deductible only if those transactions would likewise have given rise to a right of deduction in the Member State in which the branch is registered. In this regard, I note that, as far as the calculation of that proportion is concerned, the French Government’s position differs from that of the Commission. The French Government proposes that the turnover made by the branch with its own clients should be re-incorporated into the fraction of the deductible proportion applicable to that branch so as, firstly, to ensure that a single deductible proportion is determined ‘for all the transactions carried out by the taxable person’, in accordance with the second subparagraph of Article 17(5) of the Sixth Directive and the second subparagraph of Article 173(1) of Directive 2006/112, and, secondly, to avoid infringing the prohibition of a deductible proportion by geographic areas, a prohibition which stems from paragraph 53 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541). By contrast, the Commission rules out account being taken of the turnover made by the branch with third parties since that turnover does not relate to transactions exclusively assigned to transactions of the principal establishment.
95. I tend to agree with the French Government’s analysis.
96. I would observe that, in accordance with their wording, the second subparagraph of Article 17(5) of the Sixth Directive and the second subparagraph of Article 173(1) of Directive 2006/112 state that the deductible proportion to be used is to be determined ‘for all the transactions carried out by the taxable person’. (48)
97. It is true that those provisions appear in the respective chapter of each of the two VAT directives on the ‘proportional deduction’ and are therefore concerned with establishing the rules governing the right to deduct VAT chargeable on the acquisition of mixed use goods and services, (49) that is to say those goods and services intended for use both for transactions in respect of which VAT is deductible and those in respect of which it is not. These are therefore provisions which govern the partial deduction of VAT. (50)
98. However, the Commission misconstrues those articles where it submits, in essence, that, since the output transactions carried out by the French branch for the benefit of its clients in France — which do not form the subject matter of the dispute in the main proceedings — appear to give rise to a right of deduction in full, (51) they do not fall within the category of transactions covered by the aforementioned provisions of the two VAT directives.
99. The Commission forgets that the single deductible proportion must be determined not just according to the mixed-use expenditure of the branch but also the expenditure of the taxable person in the Member State in which the deduction is sought. Indeed, ‘all the transactions carried out by the taxable person’ necessarily also encompasses all the transactions carried out by the French branch.
3. The issue of ‘a possible option mechanism’
100. At the end of its first question, the referring court mentions ‘a possible option mechanism for imposing [VAT]’ which the Court could take into account in its response and which might have an impact on that response.
101. Aside from the option to which I have already referred and which, in the main proceedings, the French branch exercised in the Member State in which it is registered for its banking and financial transactions to be liable to VAT — pursuant to the first paragraph of Article 13(C) of the Sixth Directive and Article 137(1) of Directive 2006/112, which are transposed into the CGI —, the referring court has not mentioned another type of option.
102. In those circumstances, I will confine my analysis to the option exercised by the French branch in its Member State of registration, an option which — in my view — must of course be taken into account in order to determine the scope of the taxable person’s right of deduction in that Member State.
103. In that regard, I take the view that, in accordance with the principle of the combined application of the rules on deduction of the two Member States concerned, the French branch’s right of deduction in relation to the expenditure which it incurred exclusively for the benefit of the transactions of its London principal establishment with third parties will depend, first, on whether the transactions in question give rise to a right to deduct VAT, in full or in part, in the United Kingdom.
104. I would point out that, if the transactions in question do not give rise to a right of deduction in that Member State, the VAT charged on the input expenditure may not be deducted in France, notwithstanding the option exercised by the branch in France to make the banking and financial transactions carried out in that Member State liable to VAT. Indeed, as I have stated, in essence, in points 44 to 46 of this Opinion, Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112 cannot be interpreted as allowing a taxable person to benefit from a right to deduct the input VAT paid on expenditure which has a direct and immediate link with output transactions in respect of which VAT is not deductible, regardless of where those transactions were carried out.
105. This approach in no way means, contrary to the claim made by Morgan Stanley in its observation, that the option exercised by the branch in relation to its banking and financial transactions in France is deprived of any practical effect. That option is entirely effective — and, moreover, necessary — to allow input VAT to be deducted in respect of the transactions carried out by the branch for the benefit of its clients in France. In accordance with Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112, it likewise remains wholly effective for the purposes of determining the scope of the branch’s right of deduction in relation to expenditure which has a direct and immediate link with the output transactions of the principal establishment in respect of which VAT is deductible in the United Kingdom. If that option were not exercised, the input VAT on such expenditure could not be deducted in France, pursuant to Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112.
106. That being said, if the output transactions carried out by the London principal establishment do give rise to a right of deduction in the Member State in which it is located, it will be necessary, secondly, to verify whether, under French legislation, those same transactions would have given rise to a right of deduction, in accordance with the option exercised by the French branch in the Member State in which it is registered, if they had been carried out in that Member State, pursuant to Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112.
107. To all intents and purposes, and even though the referring court does not provide any clarification in this regard, it likewise appears that the reference to the option mechanism echoes the practice of the French tax authority, in accordance with which the options exercised vis-à-vis the liability to VAT of banking and financial transactions are personal to each fixed establishment. (52) Quite clearly, the personal nature of the option, which is the result of a mere administrative practice, cannot form a barrier to the full application of EU law, here that of the material conditions governing the right of deduction claimed in France. In any event, I observe, first, that it is the French branch which seeks the right of deduction in the Member State in which it is registered and, second, that that branch forms a single taxable person together with the principal establishment located in the other Member State.
108. In the light of all the foregoing considerations, I propose that the first question referred for a preliminary ruling be answered as follows: in circumstances where expenditure of a branch of a taxable person, located in one Member State, is exclusively used for the transactions of the principal establishment of that taxable person, located in another Member State, the provisions of Articles 17(2), (3) and (5) and Article 19(1) of Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, incorporated in Articles 168, 169 and 173 to 175 of Directive 2006/112, must be interpreted as requiring the Member State in which the branch is registered to apply to that expenditure the branch’s deductible proportion, determined taking into account the output transactions carried out by the principal establishment with third parties, in accordance with the rules applicable in that Member State and in the Member State in which the taxable person’s principal establishment is located.
C. The second question
109. The second question put by the referring court concerns the rules on deduction to be applied where some expenditure borne by the French branch is used without distinction for its own transactions in the Member State in which it is registered and for transactions of the principal establishment, ‘particularly as regards the concept of general costs and the proportion of tax deductible’.
110. In Morgan Stanley’s view, the answer to this question must be identical to the proposed answer to the first question. Thus, expenditure borne by the branch which is used for its transactions in the Member State in which it is registered and for transactions of the principal establishment are general costs, with the meaning of the case-law of the Court, (53) to which only the branch’s deductible proportion, determined according only to the transactions which it carries out in the Member State in which it is registered, should be applied. This solution must lead to the finding that mixed expenditure has no direct link with the internal flows of funds resulting from the impact of the costs for the London principal establishment, but is rather linked to that principal establishment’s activity as a whole. According to Morgan Stanley, the right of deduction will therefore be determined by applying a proportion calculated according to the turnover made by the French branch, which — on account of the option exercised by that branch — must entail the deduction in full of the VAT charged on the expenditure.
111. The French Government takes the view, a view endorsed by the Commission, that, provided that the expenditure borne by the French branch may be classified as general costs of the taxable person, a right of deduction in France might arise. In such circumstances, a single deductible proportion must be determined for all the mixed expenditure incurred by the French branch for the benefit of the single taxable person formed by that branch together with the London principal establishment.
112. I concur with that view.
113. First of all, as the parties concerned agree, although — in accordance with now well-established case-law — for the VAT charged on the acquisition of input goods and services to be deductible there must, in principle, be a direct and immediate link between that transaction and the output transactions giving rise to a right of deduction, a taxable person also, however, enjoys that right when there is no such direct and immediate link, where the costs of the services in question are part of the taxable person’s general costs and are, as such, components of the price of the services which he provides. Such costs do in fact have a direct and immediate link with the taxable person’s economic activity as a whole. (54)
114. Next, in the present case, in my view, it necessarily follows from the case-law cited in the two preceding points — as well as from the obligation to determine a single deductible proportion for all the mixed expenditure of a taxable person, in accordance with the second subparagraph of Article 17(5) of the Sixth Directive and the second subparagraph of Article 173(1) of Directive 2006/112 (55) ‐ that, if such general costs do have a direct and immediate link with the taxable person’s economic activity as a whole, both the branch’s transactions for the benefit of its clients and those for the benefit of the principal establishment of that taxable person, which include those costs, must be taken into account in order to determine the deductible proportion applicable in the Member State in which the branch is registered.
115. There is in fact no reason to adopt a different approach. Since the taxable person’s output transactions are carried out in part in another Member State, account must be taken of them, just as they would be taken into account if all the activities of that taxable person were carried out within the territory of one and the same Member State.
116. Finally, this solution likewise appears to me to be consistent with the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541, paragraphs 34 and 53) for the reasons set out in points 70 to 85 and 94 to 99 of this Opinion.
117. The deductible proportion will therefore include, as the numerator, the turnover made by the French branch relating to the transactions in respect of which VAT is deductible in France (56) as well as that made by the London principal establishment relating to the transactions in respect of which VAT is deductible in the United Kingdom, which would also give rise to a right of deduction in France. (57) The denominator of the fraction will include the turnover relating to all the transactions carried out by the branch and by the principal establishment with third parties.
118. In those circumstances, I propose that the Court answer the second question referred for a preliminary ruling as follows: the deductible proportion of the VAT charged on the expenditure borne by the branch of a taxable person, located in one Member State, which is used both for transactions of that branch in the Member State in which it is registered and for transactions of the principal establishment of that taxable person, located in another Member State, must be determined according to the same rules and procedures as for the expenditure incurred by that branch which is exclusively used for transactions of that principal establishment with third parties.
III. Conclusion
119. In the light of the foregoing considerations, I propose that the Court answer the questions referred by the Conseil d’État (Council of State, France) as follows:
(1) In circumstances where expenditure of a branch of a taxable person, located in one Member State, is exclusively used for the transactions of the principal establishment of that taxable person, located in another Member State, the provisions of Article 17(2), (3) and (5) and Article 19(1) of Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, incorporated in Articles 168, 169 and 173 to 175 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, must be interpreted as requiring the Member State in which the branch is registered to apply to that expenditure the branch’s deductible proportion, determined taking into account the output transactions carried out by the principal establishment with third parties, in accordance with the rules applicable in that Member State and in the Member State in which the taxable person’s principal establishment is located.
(2) The deductible proportion of the VAT charged on the expenditure borne by the branch of a taxable person, located in one Member State, which is used both for transactions of that branch in the Member State in which it is registered and for transactions of the principal establishment of that taxable person, located in another Member State, must be determined according to the same rules and procedures as for the expenditure incurred by that branch which is exclusively used for transactions of that principal establishment with third parties.