Tax alert

Luxembourg
September 2013
On 12th September 2013, the Court of Justice of the European Union (CJEU) has delivered its
judgment in the case of Le Crdit Lyonnais (C-388/11) on the extent to which the turnover-based
pro-rata partial exemption calculation may include revenue generated by foreign branches.
Significantly, the CJEU judgment reflected the Advocate Generals opinion and ruled that in
determining the deductible proportion of VAT, a company which is situated in a Member State
may not take into account the turnover of its branches established in other Member States or
outside the EU. Furthermore, in relation to special method calculations, a Member State may
not authorise a company to take into account the turnover of a branch established in another
Member State or in a third State.
Background
Following a tax audit covering the period from 1 January 1988 to 31 December 1989, Le Crdit
Lyonnais, headquartered in France, was assessed by the French tax authority on the basis that
the company had included interest earned on loans granted by its headquarters to its branches
abroad in the numerator and denominator of the deductible proportion of its input VAT.
Through subsequent appeals against the assessment, Le Crdit Lyonnais sought to argue that the
income generated by branches from third parties must be its income and should be included, if
the interest charged by the head office to those branches must be excluded, because they were
part of the same entity.
The French Administrative Supreme Court submitted a reference for a preliminary ruling to
the CJEU concerning the calculation of the VAT-deductible proportion of the bank and the
computation of the pro-rata for a banks branches abroad in light of the interpretation of the
neutrality principle.
Le Crdit Lyonnais: CJEU judgment: Partial
exemption: Foreign branch income
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Contacts
Michel Lambion
Partner
+352 42 124 7158
michel.lambion@lu.ey.com
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Partner
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Executive Director
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Senior Manager
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The Judgment
On the question of whether the principal establishment of a company established in
one Member State may take into account the revenue generated by each of its foreign
branches in calculating its partial exemption recovery rate, the Advocate General
answered in the negative.
The CJEUs judgment reflects the Advocate Generals opinion, stating that in
determining the deductible proportion of VAT applicable to it, a company, the principal
establishment of which is situated in a Member State, may not take into account the
turnover of its branches established in other Member States or non-EU countries.
Furthermore, a Member State is not permitted to adopt a rule for the calculation of
the deductible proportion per business sector of a company authorising that company
to take into account the turnover of a branch established in another Member State or
in a third State.
What is the impact for the Luxembourgish businesses?
Even if this decision relates to a bank, its impact is not limited to the banking sector.
It could also concern businesses of other sectors (e.g., insurance, private equity, real
estate, etc.) which have foreign branches.

It is thus extremely important that Luxembourgish businesses pay attention to this
ruling and monitor its potential impact, taking into consideration the recent Circular
765 of 15 May 2013 regarding the VAT deduction methodology, see our tax alert of
15 May 2013 - VAT deduction right, and also to pay attention to any future potential
guidance issued by the Luxembourg VAT Authorities in this respect. In particular,
businesses should review the respective costs / revenue structures of the head
office and its branch(es) in order to determine the most appropriate VAT deductible
proportion
Further information
EY has a global Indirect Tax practice which is experienced in providing support in relation to
technical VAT issues. If you feel that the case could potentially have implications for your
business, and you would like to discuss the position in more detail, please speak with an EY
Indirect Tax contact.