C-165/17 Morgan Stanley & Co International

JUDGMENT OF THE COURT (Fourth Chamber)

24 January 2019 ( *1 )

(Reference for a preliminary ruling — Taxation — Value added tax (VAT) — Sixth Council Directive 77/388/EEC — Directive 2006/112/EC — Deduction of input tax — Goods and services used for both taxable transactions and exempt transactions (mixed-use goods and services) — Determination of the applicable deductible proportion — Branch established in a Member State other than that of its principal establishment — Expenditure incurred by the branch used exclusively for the transactions of the principal establishment — General costs of the branch used for both its transactions and those of the principal establishment)

In Case C‑165/17,

REQUEST for a preliminary ruling under Article 267 TFEU from the Conseil d’État (Council of State, France), made by decision of 29 March 2017, received at the Court on 3 April 2017, in the proceedings

Morgan Stanley & Co International plc

v

Ministre de l’Économie et des Finances,

THE COURT (Fourth Chamber),

composed of T. von Danwitz, President of the Seventh Chamber, acting as President of the Fourth Chamber, K. Jürimäe, C. Lycourgos, E. Juhász and C. Vajda (Rapporteur), Judges,

Advocate General: P. Mengozzi,

Registrar: C. Strömholm, Administrator,

having regard to the written procedure and further to the hearing on 1 March 2018,

after considering the observations submitted on behalf of:

Morgan Stanley & Co International plc, by C. Aldebert and C. Reinbold, avocats,

the French Government, by D. Colas, E. de Moustier, A. Alidière and S. Ghiandoni, acting as Agents,

the Portuguese Government, by L. Inez Fernandes, M. Figueiredo and R. Campos Laires, acting as Agents,

the European Commission, by N. Gossement and R. Lyal, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 3 October 2018,

gives the following

Judgment

Legal context and the dispute

1This request for a preliminary ruling 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 (OJ 1977 L 145, p. 1; ‘the Sixth Directive’), and of Articles 168, 169 and 173 to 175 of Council Directive 2006/112/EC on the common system of value added tax (OJ 2006 L 347, p. 1).

2The request has been made in proceedings between Morgan Stanley & Co International plc (‘Morgan Stanley’) and the ministre de l’Économie et des Finances (Minister for the Economy and Finance, France) (‘the tax authority’), concerning the deduction of the value added tax (VAT) paid by the Paris branch of Morgan Stanley (‘the Paris branch’), first, in respect of expenditure used for the transactions of the principal establishment located in the United Kingdom and, second, in respect of the general costs used for both transactions of the principal establishment and those of the branch.

Legal framework

Sixth Directive

3Under Article 4(1) of the Sixth Directive, ‘taxable person’ means any person who independently carries out in any place any economic activity specified in Article 4(2) of that directive, whatever the purpose or results of that activity.

4Article 13 B(d) of that directive provided that the financial transactions mentioned in that provision are exempt from VAT.

5Article 13 C of that directive provided:

‘Member States may allow taxpayers a right of option for taxation in cases of:

…

the transactions covered in B(d) …

…’

6Article 17(2), (3) and (5) of the Sixth Directive provided:

‘2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

[VAT] due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

…

3. Member States shall also grant to every taxable person the right to a deduction or refund of the [VAT] referred to in paragraph 2 in so far as the goods and services are used for the purposes of:

transactions relating to the economic activities as referred to in Article 4(2) carried out in another country, which would be eligible for deduction of tax if they had occurred in the territory of the country;

…

5. As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which [VAT] is deductible, and for transactions in respect of which [VAT] is not deductible, only such proportion of the [VAT] shall be deductible as is attributable to the former transactions.

This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person.

…’

7Article 19(1) of the Sixth Directive was worded as follows:

‘The proportion deductible under the first subparagraph of Article 17(5) shall be made up of a fraction having:

as numerator, the total amount, exclusive of [VAT], of turnover per year attributable to transactions in respect of which value added tax is deductible under Article 17(2) and (3);

as denominator, the total amount, exclusive of [VAT], of turnover per year attributable to transactions included in the numerator and to transactions in respect of which value added tax is not deductible. The Member States may also include in the denominator the amount of subsidies, other than those specified in Article 11 A(1)(a).

The proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next unit.’

8From 1 January 2007, in the context of a recasting of the Sixth Directive, the provisions thereof were replaced by those of Directive 2006/112.

Directive 2006/112

9The first subparagraph of Article 9(1) of Directive 2006/112 provides:

‘“Taxable person” shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.’

10Article 137(1)(a) of that directive provides that Member States may allow taxable persons a right of option for taxation in respect of the financial transactions referred to in Article 135(1)(b) to (g) of that directive.

11Under Article 168 of that directive:

‘In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:

the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;

…’

12Article 169 of that directive provides:

‘In addition to the deduction referred to in Article 168, the taxable person shall be entitled to deduct the VAT referred to therein in so far as the goods and services are used for the purposes of the following:

transactions relating to the activities referred to in the second subparagraph of Article 9(1), carried out outside the Member State in which that tax is due or paid, in respect of which VAT would be deductible if they had been carried out within that Member State;

…’

13Article 173(1) of Directive 2006/112 provides:

‘In the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to Articles 168, 169 and 170, and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible.

The deductible proportion shall be determined, in accordance with Articles 174 and 175, for all the transactions carried out by the taxable person.’

14Article 174(1) of that directive reads as follows:

‘The deductible proportion shall be made up of a fraction comprising the following amounts:

as numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible pursuant to Articles 168 and 169;

as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.

…’

15Article 175(1) of that directive specifies that the deductible proportion is to be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next whole number.

The dispute in the main proceedings and the questions referred for a preliminary ruling

16It is apparent from the order for reference that the Paris branch, as a fixed establishment, is subject to VAT in France. It was 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.

17In the course of those inspections, it was found that that branch, on the one hand, carried out banking and financial transactions for its local clients, in respect of which it had opted to be liable to VAT, and, on the other, supplied services to the principal establishment located in the United Kingdom, in return for which it received transfers. The branch deducted the whole of the VAT to which the expenditure attributable to those two categories of services was subject.

18The tax authorities considered that the VAT charged in respect of the acquisition of the goods and services used solely for internal transactions with the principal establishment located in the United Kingdom was not deductible, since these transactions fell beyond the scope of application of VAT but nonetheless allowed, by way of mitigation, deduction of a fraction of the tax at issue by deducting a proportion applicable to that principal establishment, subject to the exceptions to the right of deduction applicable in France. With regard to mixed expenditure, attributable to transactions carried out with both the principal establishment located in the United Kingdom and clients of the Paris branch, the tax authorities considered that they were only partially deductible and applied the deductible proportion applicable to that principal establishment, adjusted according to the Paris branch’s turnover giving rise to the right to deduct, subject to the exceptions to the right of deduction applicable in France.

19In the light of those corrections, the tax authority sent Morgan Stanley additional assessments to the VAT claimed. The tribunal administratif de Montreuil (Administrative Court, Montreuil, France) rejected Morgan Stanley’s applications for discharge from those assessments. The appeals lodged against the ruling of that court were, in turn, dismissed by the cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles, France).

20In the appeal brought against the judgment given on appeal, the Conseil d’État (Council of State, France) 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 the deductible proportion of the branch, the deductible proportion of the principal establishment, 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.

21Second, the referring court raises the question of the rules applicable in relation to the expenditure borne by a branch which is used 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.

22In those circumstances, the Conseil d’Etat (Council of State) decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:

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?

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?’

Consideration of the questions referred

The first question

23As a preliminary point, it should be noted that the main proceedings relate to the assessment periods from 2002 to 2009. In those circumstances, both the Sixth Directive and Directive 2006/112, which recast the Sixth Directive from 1 January 2007, are applicable to this dispute.

24Moreover, in so far as the first question relates to the deductible proportion which the Paris branch must apply to the expenditure that it has borne for the transactions of the principal establishment located in the United Kingdom, it must be held that that question relates to the expenditure, borne by that branch, which is used, exclusively, both for transactions subject to VAT and to transactions exempt from that tax in the Member State of that principal establishment (‘mixed-use expenditure’), which was indeed confirmed in Morgan Stanley’s written observations.

25It is also apparent from those observations that the option mechanism mentioned in the first question refers to the option taken up by the Paris branch, pursuant to the national legislation transposing the first subparagraph of Article 13 C of the Sixth Directive and Article 137(1)(a) of Directive 2006/112, to make subject to VAT Morgan Stanley’s banking and financial transactions in France, which would be exempt from VAT if that option was not exercised.

26Accordingly, by its first question, the referring court asks, in essence, whether Article 17(2), (3) and (5) and Article 19(1) of the Sixth Directive, and Articles 168, 169 and 173 to 175 of Directive 2006/112 must be interpreted as meaning that, in relation to the expenditure borne by a branch registered in a Member State, which is used, exclusively, both for transactions subject to VAT and for transactions exempt from that tax which are carried out by the principal establishment of that branch located in another Member State, it is necessary to apply the deductible proportion of that branch, determined on the basis of the transactions that it carries out in the Member State in which it is registered and of the rules applicable in that State, the deductible proportion of that principal establishment, or a specific deductible proportion, combining the rules applicable in the Member State in which that branch is registered and those applicable in the Member State of that principal establishment, where that branch has opted to make transactions carried out in the Member State in which it is registered subject to VAT, transactions which would have been exempt from that tax if such an option had not been exercised.

27In order to answer that question, it is necessary, in the first place, to recall that, according to settled case-law of the Court, the right of taxable persons to deduct from the VAT which they are liable to pay the VAT due or paid on goods purchased and services received by them as inputs is a fundamental principle of the common system of VAT established by EU legislation. That right of deduction is an integral part of the VAT scheme and in principle may not be limited. The right is exercisable immediately in respect of all the taxes charged on transactions relating to inputs (judgment of 15 September 2016, Barlis 06 — Investimentos Imobiliários e Turísticos, C‑516/14, EU:C:2016:690, paragraphs 37 and 38 and the case-law cited).

28The deduction system is intended to relieve the trader entirely of the burden of the VAT due or paid in the course of all his economic activities. The common system of VAT therefore ensures that all economic activities, whatever their purpose or results, provided that they are in principle themselves subject to VAT, are taxed in a neutral way (judgment of 15 September 2016, Barlis 06 — Investimentos Imobiliários e Turísticos, C‑516/14, EU:C:2016:690, paragraph 39 and the case-law cited).

29In that regard, it is apparent from Article 17(2)(a) of the Sixth Directive and Article 168(a) of Directive 2006/112 that a taxable person is entitled, in the Member State in which he carries out his own taxed transactions, to deduct, from the VAT which he is liable to pay, the VAT due or paid in that Member State in respect of goods and services, in so far as those goods and services were used as outputs by the taxable person for the purposes of those transactions (see, to that effect, judgment of 15 September 2016, Barlis 06 — Investimentos Imobiliários e Turísticos, C‑516/14, EU:C:2016:690, paragraph 40 and the case-law cited).

30Thus, the Court has held that, for VAT to be deductible, the input transactions must have a direct and immediate link with the output transactions giving rise to a right of deduction. The right to deduct VAT charged on the acquisition of input goods or services presupposes that the expenditure incurred in acquiring them was a component of the cost of the output transactions that gave rise to the right to deduct (judgment of 16 July 2015, Larentia + Minerva and Marenave Schiffahrt, C‑108/14 and C‑109/14, EU:C:2015:496, paragraph 23 and the case-law cited).

31Furthermore, under Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112, a taxable person is entitled to deduct the tax due or paid in respect of the goods and services used for the purposes of transactions carried out outside the Member State referred to in paragraph 29 of this judgment, in respect of which VAT would be deductible if they had been carried out within that Member State.

32The right to deduct laid down in the provisions cited in the previous paragraph is therefore subject to the twofold condition (i) that the transactions of a taxable person effected in a Member State other than the State in which the VAT is due or paid in respect of the goods and services used to carry out those transactions be taxed in the first of those Member States and (ii) that those transactions also be taxed if they were effected in the second of those States (see, to that effect, judgments of 13 July 2000, Monte Dei Paschi Di Siena, C‑136/99, EU:C:2000:408, paragraph 28, and of 22 December 2010, RBS Deutschland Holdings, C‑277/09, EU:C:2010:810, paragraphs 31 and 32).

33In the absence of any further clarification in Article 17(3)(a) of the Sixth Directive and Article 169(a) of Directive 2006/112, it must be held that the latter condition is inter alia fulfilled in a situation, such as that at issue in the main proceedings, in which the transactions taxed in the Member State of the principal establishment are also taxed in the Member State of registration of the branch which has borne the expenditure relating thereto on account of an option exercised by that branch under the national legislation transposing the first subparagraph of Article 13 C of the Sixth Directive and Article 137(1)(a) of Directive 2006/112.

34In the second place, it should be recalled that Article 4(1) of the Sixth Directive and the first subparagraph of Article 9(1) of Directive 2006/112 define ‘taxable persons’ for VAT purposes as persons who carry out any economic activity ‘independently’ (see, to that effect, judgments of 23 March 2006, FCE Bank, C‑210/04, EU:C:2006:196, paragraph 33, and of 7 August 2018, TGE Gas Engineering, C‑16/17, EU:C:2018:647, paragraph 40).

35With regard to a company whose principal establishment is located in a Member State and whose branch is registered in another Member State, it is apparent from the case-law of the Court that the principal establishment and the branch constitute a single taxable person subject to VAT, unless it is established that the branch carries out an independent economic activity, which would be the case inter alia if it were to bear the economic risk arising from its business (see, to that effect, judgment of 7 August 2018, TGE Gas Engineering, C‑16/17, EU:C:2018:647, paragraph 41 and the case-law cited).

36In this case, nothing in the case file before the Court suggests that the Paris branch acts independently of the principal establishment located in the United Kingdom, for the purposes of the case-law cited in paragraph 35 of this judgment. Accordingly, and subject to verification by the referring court, it must be held that that branch and that principal establishment constitute a single taxable person for VAT purposes.

37In that context, it should be recalled that a supply of services is taxable only if there exists between the service supplier and the recipient a legal relationship in which there is a reciprocal performance (judgments of 23 March 2006, FCE Bank, C‑210/04, EU:C:2006:196, paragraph 34, and of 17 September 2014, Skandia America (USA), filial Sverige, C‑7/13, EU:C:2014:2225, paragraph 24).

38Thus, it must be pointed out that, in the absence of any legal relationship between a branch and its principal establishment, which, together, form a single taxable person, reciprocal performance between those entities constitutes non-taxable internal flows of funds, unlike taxed transactions carried out with third parties.

39It follows that a branch registered in a Member State is entitled to deduct, in that State, the VAT charged on the goods and services acquired which have a direct and immediate link with the carrying out of the taxed transactions, including those of its principal establishment established in another Member State, with which that branch forms a single taxable person, on condition that those transactions would also give rise to deduction if they had been carried out in the State in which that branch is registered.

40In the third place, as regards goods and services used by a taxable person for both transactions in respect of which VAT is deductible and for transactions in respect of which VAT is not deductible, under 173(1) of Directive 2006/112, which corresponds to Article 17(5) of the Sixth Directive, only such proportion of the VAT as is attributable to those transactions is to be deductible. For this purpose, a deductible proportion must be determined, in accordance with Articles 174 and 175 of Directive 2006/112, ‘for all the transactions carried out by the taxable person’.

41That pro rata system applies, inter alia, where a branch registered in a Member State incurs expenditure for the purposes both of taxed transactions and VAT-exempt transactions carried out by its principal establishment established in another Member State (see, to that effect, judgment of 13 July 2000, Monte Dei Paschi Di Siena, C‑136/99, EU:C:2000:408, paragraphs 26 to 28).

42The Court has made it clear that the deduction system laid down in Article 17(5) of the Sixth Directive and Article 173(1) and (2) of Directive 2006/112 and the methods of deduction of which that system consists apply only to the goods and services used by a taxable person to carry out both economic transactions which give rise to a right to deduct and those which do not, that is to say, goods and services for mixed use (see, to that effect, judgments of 6 September 2012, Portugal Telecom, C‑496/11, EU:C:2012:557, paragraph 40; of 16 July 2015, Larentia + Minerva and Marenave Schiffahrt, C‑108/14 and C‑109/14, EU:C:2015:496, paragraph 26, and of 9 June 2016, Wolfgang und Dr. Wilfried Rey Grundstücksgemeinschaft, C‑332/14, EU:C:2016:417, paragraph 26).

43On the other hand, the goods and services which are used by the taxable person solely to carry out economic transactions giving rise to a right to deduct do not fall within the scope of Article 17(5) of the Sixth Directive or Article 173(1) of Directive 2006/112, but are covered, as regards the deduction system, by Article 17(2) of the Sixth Directive and Article 168 of Directive 2006/112, respectively (judgment of 6 September 2012, Portugal Telecom, C‑496/11, EU:C:2012:557, paragraph 41).

44It follows from that case-law that, as the Commission essentially observed at the hearing, the clarification in the second subparagraph of Article 17(5) of the Sixth Directive and the second subparagraph of Article 173(1) of Directive 2006/112, according to which, in respect of the goods and services used by a taxable person for both taxed transactions and VAT-exempt transactions, the deductible proportion must be determined ‘for all the transactions carried out by the taxable person’, refers to all the transactions referred to above, in which those mixed-use goods and services acquired by the taxable person have been used, to the exclusion of the other economic transactions carried out by that person.

45Thus, in so far as, in addition to mixed-use expenditure, the taxable person acquires goods and services which are used exclusively for transactions subject to VAT, the VAT charged on those goods and services may be deducted in full, in accordance with Article 17(2) and (3) of the Sixth Directive, and Articles 168 and 169 of Directive 2006/112 (see, to that effect, judgment of 14 September 2017, Iberdrola Inmobiliaria Real Estate Investments, C‑132/16, EU:C:2017:683, paragraph 27 and the case-law cited). Conversely, VAT charged on the goods and services used exclusively for the purposes of any transactions exempt from that tax do not give rise to any right to deduct.

46It follows that, with respect to mixed-use expenditure incurred by a branch registered in a Member State used, exclusively, both for taxed transactions and VAT-exempt transactions carried out by the principal establishment of that branch, established in another Member State, it is necessary to apply a deductible proportion, the denominator of which is formed by the turnover, exclusive of VAT, relating to all those transactions, to the exclusion of the other transactions carried out by the taxable person, following the methodology referred to in Article 19(1) of the Sixth Directive and in Articles 174 and 175 of Directive 2006/112. In that regard, it should be specified that, in accordance with Article 17(3) of the Sixth Directive and Article 169(a) of Directive 2006/112, and with the case-law cited in paragraph 32 of this judgment, only turnover, exclusive of VAT, relating to the taxed transactions carried out by the principal establishment, in respect of which VAT would also be deductible if they had been carried out within the Member State in which the branch was located, may be included in the numerator of the fraction which makes up the deductible proportion.

47It should also be specified that the deductible proportion indicated in the previous paragraph cannot necessarily be classified as a ‘proportion applicable to the principal establishment’, as referred to in the first question referred. Only transactions carried out by the principal establishment to which the mixed-use expenditure of the branch was allocated are concerned.

48Morgan Stanley submits that the Member State in which the branch is registered must apply to all its input expenditure, irrespective of its connection with the activity of the principal establishment established in another Member State, the deductible proportion of the branch, determined on the basis solely of the transactions which that branch carries out in the State in which it is registered. However, that interpretation cannot be upheld.

49For the purposes of calculating the deductible proportion applicable to mixed-use expenditure of a branch, that solution does not take account, contrary to the case-law cited in paragraph 30 of this judgment, of the transactions carried out by the principal establishment of that branch, with which that expenditure has a direct and immediate link.

50That interpretation is not invalidated by the case-law stemming from the judgment of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541), case-law which Morgan Stanley cites in support of its line of argument. It is true that, in paragraphs 40 and 55 of that judgment, the Court held that, in determining the deductible proportion of VAT applicable to it under the deduction system provided for in Article 17(5) of the Sixth Directive, 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.

51In that regard, it should, however, be pointed out that, as is apparent inter alia from paragraph 19 of that judgment, the Court was asked to rule in that case on the possibility of taking into account the total turnover of those branches, understood as all their income. Thus, the Court stated inter alia, in paragraph 38 of the judgment of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541), that taking into account of the turnover of all the fixed establishments which the taxable person has in other Member States, for the purposes of determining the deductible proportion of the 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 located outside that State. Thus, the amount of the applicable deductible proportion would be distorted.

52It follows that, in that judgment, the Court ruled out taking into account, in calculating the deductible proportion of the principal establishment of a taxable person, the turnover of the branches located in other Member States, on the ground that at least some of that turnover had no connection with the input acquisitions effected by that principal establishment. Consequently, the Court did not intend to rule out, in determining the scope of the right to deduct of a fixed establishment of a taxable person located in a Member State, taking into account transactions carried out by a fixed establishment of that taxable person, located in another Member State, which have a direct and immediate link with expenditure borne by the first of those fixed establishments.

53Moreover, nor can the calculation of the proportion relating to those transactions carried out by that principal establishment be based on the turnover that that branch achieves with that establishment, as the French Government proposes. As was recalled in paragraph 38 of this judgment, that turnover consists of non-taxable internal flows of funds of the taxable person, while, in accordance with Article 17(5) of the Sixth Directive and Article 173(1) of Directive 2006/112, it is necessary to take account, for the purposes of calculating the deductible proportion, of the taxed and VAT-exempt transactions that a taxable person carries out with third parties.

54In the light of all of the foregoing considerations, the answer to the first question is that Article 17(2), (3) and (5) and Article 19(1) of the Sixth Directive, and Articles 168, 169 and 173 to 175 of Directive 2006/112 must be interpreted as meaning that, in relation to the expenditure borne by a branch registered in a Member State, which is used, exclusively, both for transactions subject to VAT and for transactions exempt from that tax, carried out by the principal establishment of that branch established in another Member State, it is necessary to apply a deductible proportion resulting from a fraction the denominator of which is formed by the turnover, exclusive of VAT, made up of those transactions alone and the numerator of which is formed by the taxed transactions in respect of which VAT would also be deductible if they had been carried out in the Member State in which that branch is registered, including where that right to deduct stems from the exercise of an option, effected by that branch, consisting in making the transactions carried out in that State subject to VAT.

The second question

55By its second question, the referring court asks, in essence, how Article 17(2), (3) and (5) and Article 19(1) of the Sixth Directive, and Articles 168, 169 and 173 to 175 of Directive 2006/112 must be interpreted, in order to determine the deductible proportion applicable to the general costs of a branch registered in a Member State, which are used both for transactions carried out by that branch in that State and for transactions of the principal establishment of that branch established in another Member State.

56In that regard, it should be recalled that the existence of a direct and immediate link between a particular input transaction and a particular output transaction or transactions giving rise to the right to deduct, for the purposes of the case-law cited in paragraph 30 of this judgment, is necessary, in principle, before the taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement. The right to deduct VAT charged on the acquisition of input goods or services presupposes that the expenditure incurred in acquiring them was a component of the cost of the output transactions that gave rise to the right to deduct (judgment of 14 September 2017, Iberdrola Inmobiliaria Real Estate Investments, C‑132/16, EU:C:2017:683, paragraph 28 and the case-law cited).

57Moreover, a taxable person also has a right to deduct even where there is no direct and immediate link between a particular input transaction and an output transaction or transactions giving rise to the right to deduct, where the costs of the services in question are part of his general costs and are, as such, components of the price of the goods or services which he supplies. Such costs do have a direct and immediate link with the taxable person’s economic activity as a whole (judgment of 14 September 2017, Iberdrola Inmobiliaria Real Estate Investments, C‑132/16, EU:C:2017:683, paragraph 29 and the case-law cited).

58In those circumstances, where the economic activity of the taxable person consists of both taxed transactions and VAT-exempt transactions, it is necessary to apply to the general costs of that taxable person the deduction system provided for in Article 17(5) of the Sixth Directive and Article 173(1) of Directive 2006/112. In accordance with the reasoning set out in paragraphs 40 to 46 of this judgment, the deductible proportion relating to those general costs must be based on all the economic transactions carried out by the taxable person, following the methodology referred to in Article 19(1) of the Sixth Directive and in Articles 174 and 175 of Directive 2006/112.

59With respect to the deductible proportion to apply to the general costs of a branch registered in a Member State, where the taxable person carries out transactions in both that State and the Member State in which his principal establishment is established, it is necessary that, in the numerator of the fraction making up that deductible proportion, besides the taxed transactions carried out by that branch, solely the taxed transactions carried out by that principal establishment must appear, in respect of which VAT would also be deductible if they had been carried out in the State in which that branch is registered.

60In the light of the foregoing considerations, the answer to the second question is that Article 17(2), (3) and (5) and Article 19(1) of the Sixth Directive, and Articles 168, 169 and 173 to 175 of Directive 2006/112 must be interpreted as meaning that, in order to determine the deductible proportion applicable to the general costs of a branch registered in a Member State, which are used for both transactions of that branch in that State and transactions of the principal establishment of that branch established in another Member State, account must be taken, in the denominator of the fraction which makes up that deductible proportion, of the transactions carried out by both that branch and that principal establishment, it being specified that it is necessary that, in the numerator of that fraction, besides the taxed transactions carried out by that branch, solely the taxed transactions carried out by that principal establishment must appear, in respect of which VAT would also be deductible if they had been carried out in the State in which the branch concerned is registered.

Costs

61Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

On those grounds, the Court (Fourth Chamber) hereby rules:

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, and 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 meaning that, in relation to the expenditure borne by a branch registered in a Member State, which is used, exclusively, both for transactions subject to value added tax and for transactions exempt from that tax, carried out by the principal establishment of that branch established in another Member State, it is necessary to apply a deductible proportion resulting from a fraction the denominator of which is formed by the turnover, exclusive of value added tax, made up of those transactions alone and the numerator of which is formed by the taxed transactions in respect of which value added tax which would also be deductible if they had been carried out in the Member State in which that branch is registered, including where that right to deduct stems from the exercise of an option, effected by that branch, consisting in making the transactions carried out in that State subject to value added tax.

Article 17(2), (3) and (5) and Article 19(1) of Sixth Directive 77/388, and Articles 168, 169 and 173 to 175 of Directive 2006/112 must be interpreted as meaning that, in order to determine the deductible proportion applicable to the general costs of a branch registered in a Member State, which are used for both transactions of that branch in that State and transactions of the principal establishment of that branch established in another Member State, account must be taken, in the denominator of the fraction which makes up that deductible proportion, of the transactions carried out by both that branch and that principal establishment, it being specified that it is necessary that, in the numerator of that fraction, besides the taxed transactions carried out by that branch, solely the taxed transactions carried out by that principal establishment must appear, in respect of which value added tax would also be deductible if they had been carried out in the State in which the branch concerned is registered.

Signatures

[Signatures]

( *1 ) Language of the case: French.

OPINION OF ADVOCATE GENERAL

MENGOZZI

delivered on 3 October 2018 ¹

(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

1This 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

2The 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.

3More 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

4In 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.

5The 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.

6Morgan 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.

7Ruling 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.

8Having 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.

9In 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:

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?

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?’

10Written 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

11A 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.

12First 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

13Next, 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.

14Lastly, 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.

15Firstly, 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).

16Secondly, 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

17In 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.

18It 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.

19The 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.

20There are, however, two main reasons why I propose that the Court’s response should not be restricted in that way.

21Firstly, 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).

22Secondly, 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.

23It 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.

24I 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

25I 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.

26Whilst 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.

27As 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.

28In 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

29The right to deduct input VAT varies according to the intended use of the goods and services at issue. ¹⁵

30Firstly, 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.

31In 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

32In 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.

33Thus, 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.

34Subject 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

35As 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.

36There 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.

37The question is, however, raised whether the articles cited above may be interpreted as also extending the material scope of such a right.

38Whilst 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’.

39A 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.

40Although 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.

41Notwithstanding 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.

42Thus, 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

43In 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.

44It 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.

45That 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.

46This 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.

47Similarly, 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.

48It 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

49That 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.

50Similar 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.

51In 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

52The 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

53What 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?

54First 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).

55Next, 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.

56The 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.

57Lastly, 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.

58As 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.

59As 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.

60However, 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.

61I 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

62As 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.

63In 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.

64In 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.

65Morgan 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.

66First 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

67In 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

68In 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

69In 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

70In 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.

71Indeed, 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

72The 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.

73Secondly, 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.

74On 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.

75It 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

76Further 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.

77Although 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).

78Indeed, 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

79The 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’.

80In 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.

81Moreover, 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

82Paragraph 55 of the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541) cannot therefore be construed as Morgan Stanley claims.

83It 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.

84The 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).

85The 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.

86Although 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

87Without 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.

88As 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.

89With 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

90In 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.

91Without 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.

92Accordingly, 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.

93Next, 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.

94Lastly, 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.

95I tend to agree with the French Government’s analysis.

96I 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

97It 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

98However, 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.

99The 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’

100At 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.

101Aside 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.

102In 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.

103In 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.

104I 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.

105This 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.

106That 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.

107To 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.

108In 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

109The 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’.

110In 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.

111The 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.

112I concur with that view.

113First 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

114Next, 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.

115There 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.

116Finally, 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.

117The 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.

118In 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

Conclusion

119In 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:

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.

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.

¹ Original language: French.

² OJ 1977 L 145, p. 1.

³ OJ 2006 L 347, p. 1.

⁴ It is for this reason that reference must be made both to the Sixth Directive, applicable until 31 December 2006, and to Directive 2006/112, which entered into force on 1 January 2007.

⁵ Respectively, the first paragraph of Article 13(C) of the Sixth Directive and Article 137(1)(a) of Directive 2006/112, transposed into French law by Article 260(B) of the CGI.

⁶ It is clear from the documents before the Court, in particular the judgment of the cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles, France) of 27 January 2015, which was the subject of the appeal lodged before the Conseil d’État (Council of State) that forms the starting point of the present case, that the transfers were intended to cover the expenditure incurred by the French branch for the purposes of ‘Equity Sales’ (transactions relating to equity markets) and ‘Fixed Income Sales’ (transactions relating to bond markets, foreign exchange derivatives markets or commodities markets) carried out by the London principal establishment. It should be noted that the judgment of the cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles) was published in the Revue de droit fiscal, No 16, 2015, comm. 273, and commented on by Féron, I., ‘Après Le Crédit Lyonnais, Morgan Stanley: faut-il fermer toutes les succursales françaises?’. That judgment, together with the case pending before the Court, has also sparked debate amongst French tax specialists: see, in addition to the commentary cited above, Debat, O., ‘Réflexion sur l’application de la réglementation de la taxe sur la valeur ajoutée aux ‘opérations’ entre une société et sa succursale étrangère’, Revue de droit bancaire et financier, No 3, 2015; Sérandour, Y., ‘Droit à déduction de la TVA sur les frais engagés par une succursale au profit de son siège établi dans un autre État membre: quelle étendue?’, Revue de droit fiscal, No 23, 2017, p. 333; and Pottier E., ‘Avancées notables en matière de droit à déduction de la TVA pour les succursales françaises d’entreprises étrangères réalisant des opérations bancaires et financières: la saga Morgan Stanley’, Revue internationale des services financiers, No 2, 2017, p. 129.

⁷ Eighth Council Directive 79/1072/EEC of 6 December 1979 on the harmonisation of the laws of the Member States relating to turnover taxes ‐ Arrangements for the refund of value added tax to taxable persons not established in the territory of the country (OJ 1979 L 331, p. 11). This directive was replaced by Council Directive 2008/9/EC of 12 February 2008 laying down detailed rules for the refund of value added tax, provided for in Directive 2006/112, to taxable persons not established in the Member State of refund but established in another Member State (OJ 2008 L 44, p. 23).

⁸ Indeed, the Court regularly makes the point that the regulatory framework established by Article 17(3) and (4) of the Sixth Directive (which corresponds, in essence, to Articles 170 and 171(1) of Directive 2006/112) and, in particular, by the Eighth Directive draws a distinction based solely on the place of establishment of the taxable person, which assumes that — as far as the method of refunding VAT is concerned — there are only two categories of taxable persons, the first of which (taxable persons established within the territory of the country) are entitled to deduct VAT and the second of which (taxable persons not established within the territory of the company) are entitled to a refund of that tax: see, to that effect, judgments of 16 July 2009, Commission v Italy (C‑244/08, not published, EU:C:2009:478, paragraph 36) and of 25 October2012, Daimler and Widex (C‑318/11 and C‑319/11, EU:C:2012:666, paragraph 40), and order of 21 June 2016, ESET (C‑393/15, not published, EU:C:2016:481, paragraph 30).

⁹ See, to that effect, judgments of 23 March 2006, FCE Bank (C‑210/04, EU:C:2006:196, paragraphs 33 and 35); of 17 September 2014, Skandia America (USA), filial Sverige (C‑7/13, EU:C:2014:2225, paragraphs 23 and 25); and of 7 August 2018, TGE Gas Engineering (C‑16/17, EU:C:2018:647, paragraph 40). See also, to that effect, in a different context, judgment of 29 September 2015, Gmina Wrocław (C‑276/14, EU:C:2015:635, paragraph 34). In paragraph 36 of that judgment, the Court also makes clear that the words ‘independently’ and ‘autonomously’, which are used interchangeably in the different language versions of Article 9(1) of Directive 2006/112, are essentially comparable.

¹⁰ See judgment of 23 March 2006, FCE Bank (C‑210/04, EU:C:2006:196, paragraph 37). See also, to that effect, judgments of 16 July 2009, Commission v Italy (C‑244/08, not published, EU:C:2009:478, paragraph 38); of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541, paragraph 34); and of 7 August 2018, TGE Gas Engineering (C‑16/17, EU:C:2018:647, paragraph 41).

¹¹ It should be noted that, in its judgment and in support of this interpretation, the cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles) refers to the judgments of 23 March 2006, FCE Bank (C‑210/04, EU:C:2006:196) and of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541).

¹² The interpretation adopted by the cour administrative d’appel de Versailles (Administrative Court of Appeal, Versailles) likewise applies, in part, to ‘mixed’ expenditure, namely as regards the proportion of that expenditure used for transactions carried out by the London principal establishment. In such circumstances, and adopting this approach, the deduction of VAT in respect of the mixed expenditure incurred by the branch is only partial, that is to say up to the value of the transactions carried out by that branch.

¹³ Emphasis added.

¹⁴ In accordance with Articles 17(5) and 19 of the Sixth Directive and Articles 173 and 174 of Directive 2006/112. See also, to that effect, inter alia judgments of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541, paragraphs 28 and 29) and of 16 June 2016, Kreissparkasse Wiedenbrück (C‑186/15, EU:C:2016:452, paragraphs 31 and 32).

¹⁵ See, to that effect, judgment of 9 June 2016, Wolfgang und Dr. Wilfried Rey Grundstücksgemeinschaft (C‑332/14, EU:C:2016:417, paragraph 25).

¹⁶ See, in this regard, judgment of 2 July 2009, EGN (C‑377/08, EU:C:2009:423, paragraphs 23, 25 and 33) and of 22 December 2010, RBS Deutschland Holdings (C‑277/09, EU:C:2010:810, paragraphs 30 to 33).

¹⁷ By way of reminder, the Court repeatedly observes that the right of deduction is a fundamental principle of the common system of VAT which cannot, in principle, be limited, and that the deduction system is intended to relieve the operator entirely of the burden of the VAT due or paid in the course of all his economic activities: see, inter alia, judgments of 15 September 2016, Barlis 06 — Investimentos Imobiliários e Turísticos (C‑516/14, EU:C:2016:690, paragraphs 37 and 39) and of 5 July 2018, Marle Participations (C‑320/17, EU:C:2018:537, paragraphs 24 and 25).

¹⁸ See, to that effect, inter alia, judgment of 16 July 2015, Larentia + Minerva and Marenave Schiffahrt (C‑108/14 and C‑109/14, EU:C:2015:496, paragraph 23) and order of 12 January 2017, MVM (C‑28/16, EU:C:2017:7, paragraph 29).

¹⁹ See, to that effect, inter alia, judgment of 16 July 2015, Larentia + Minerva and Marenave Schiffahrt (C‑108/14 and C‑109/14, EU:C:2015:496, paragraph 23) and order of 12 January 2017, MVM (C‑28/16, EU:C:2017:7, paragraph 29).

²⁰ In particular, the similarity of the transactions of the French branch and of the London principal establishment.

²¹ Judgment of 13 July 2000, Monte Dei Paschi Di Siena (C‑136/99, EU:C:2000:408, paragraph 28). Emphasis added.

²² See also, to that effect, order of 21 June 2016, ESET (C‑393/15, not published, EU:C:2016:481, paragraph 42).

²³ See, to that effect, judgment of 13 July 2000, Monte Dei Paschi Di Siena (C‑136/99, EU:C:2000:408, paragraph 28).

²⁴ A requirement highlighted for the first time by the Court in the judgment of 4 July 1985, Berkholz (168/84, EU:C:1985:299, paragraph 14) with regard to the uniform determination of the place where services are deemed to be provided for VAT purposes, and reproduced, inter alia, in the judgment of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541, paragraph 35).

²⁵ See, to that effect, inter alia, judgments of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541, paragraphs 28 and 29) and of 16 June 2016, Kreissparkasse Wiedenbrück (C‑186/15, EU:C:2016:452, paragraphs 31 and 32).

²⁶ See, to that effect, in the context of the refund of VAT, which is just one method of returning VAT paid (see footnote 7 above), judgment of 13 July 2000, Monte Dei Paschi Di Siena (C‑136/99, EU:C:2000:408, paragraphs 24 to 28).

²⁷ Expenditure which, as I made clear in point 15 of this Opinion, does not form the subject matter of the main proceedings.

²⁸ See, to that effect, judgment of 9 June 2016, Wolfgang und Dr. Wilfried Rey Grundstücksgemeinschaft (C‑332/14, EU:C:2016:417, paragraph 26).

²⁹ Save, as the case may be, in the case of application of a specific provision authorising the deduction of the VAT charged on the acquisition or supply of goods or services intended for exempt transactions, as stated in Article 169(b) and (c) of Directive 2006/112.

³⁰ See judgment of 9 June 2016, Wolfgang und Dr. Wilfried Rey Grundstücksgemeinschaft (C‑332/14, EU:C:2016:417, paragraph 31). Those provisions do, however, afford the Member States rather broad discretion, allowing them to apply a different calculation method, provided that the method used guarantees a more precise determination of the deductible proportion of the input VAT than that arising from the turnover-based allocation (see, to that effect, judgment of 9 June 2016, Wolfgang und Dr. Wilfried Rey Grundstücksgemeinschaft (C‑332/14, EU:C:2016:417, paragraphs 32 and 33 and the case-law cited). See also, to that effect, judgment of 16 June 2016, Kreissparkasse Wiedenbrück (C‑186/15, EU:C:2016:452, paragraph 35).

³¹ Emphasis added.

³² Emphasis added.

³³ Opinion of Advocate General Cruz Villalón in Le Crédit Lyonnais (C‑388/11, EU:C:2013:120).

³⁴ Judgment of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541, paragraph 37) (emphasis added).

³⁵ Emphasis added.

³⁶ Opinion of Advocate General Cruz Villalón in Le Crédit Lyonnais (C‑388/11, EU:C:2013:120). Emphasis added.

³⁷ See, inter alia, judgments of 8 June 2000, Midland Bank (C‑98/98, EU:C:2000:300, paragraph 24); of 29 October 2009, SKF (C‑29/08, EU:C:2009:665, paragraph 57); and of 16 July 2015, Larentia + Minerva and Marenave Schiffahrt (C‑108/14 and C‑109/14, EU:C:2015:496, paragraph 23).

³⁸ Emphasis added.

³⁹ Emphasis added.

⁴⁰ See judgment of 12 September 2013, Le Crédit Lyonnais (C‑388/11, EU:C:2013:541, paragraph 19).

⁴¹ See, inter alia, judgments of 28 June 2007, Planzer Luxembourg (C‑73/06, EU:C:2007:397, paragraph 43); of 7 October 2010, Loyalty Management UK and Baxi Group (C‑53/09 and C‑55/09, EU:C:2010:590, paragraph 39); and of 22 February 2018, T‑2 (C‑396/16, EU:C:2018:109, paragraph 43).

⁴² See, to that effect, judgments of 9 October 2001, Cantor Fitzgerald International (C‑108/99, EU:C:2001:526, paragraph 33) and of 18 July 2013, AES-3C Maritza East 1 (C‑124/12, EU:C:2013:488, paragraph 37).

⁴³ See, to that effect, judgment of 18 July 2013, AES-3C Maritza East 1 (C‑124/12, EU:C:2013:488, paragraph 38).

⁴⁴ From a different perspective, namely that of the principle of equal treatment, the Court ruled out the infringement of such a principle as between, on the one hand, a company operating through a branch and, on the other, a company doing business via a subsidiary, in the judgment in Le Crédit Lyonnais (C‑388/11, EU:C:2013:541, paragraphs 45 to 48). Although the grounds of the judgment concern relationships with non-member countries, they are equally true of relationships between Member States. Indeed, whereas, in the case of a company established in one Member State which supplies services via a fixed establishment in another Member State, the sole taxable person for VAT purposes, in accordance with the case-law of the Court, will be that formed of the principal establishment of that company together with its fixed establishment (branch), where that company provides those same services via a subsidiary in another Member State, the subsidiary will be regarded, for VAT purposes, as a taxable person in its own right in that Member State: see, to that effect, Opinion of Advocate General Cruz Villalón in Le Crédit Lyonnais (C‑388/11, EU:C:2013:120, point 72).

⁴⁵ Namely, Council Regulation (EU) No 904/2010 of 7 October 2010 on administrative cooperation and combating fraud in the field of value added tax (OJ 2010 L 268, p. 1) and, with regard to the recovery of claims, Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures (OJ 2010 L 84, p. 1) and Commission Implementing Regulation (EU) No 1189/2011 of 18 November 2011 laying down detailed rules in relation to certain provisions of Directive 2010/24/EU (OJ 2011 L 302, p. 16). See, with regard to Regulation No 904/2010, judgment of 17 December 2015, WebMindLicenses (C‑419/14, EU:C:2015:832, paragraphs 55 to 59) and, in relation to Directive 2010/24, judgment of 26 April 2018, Donnellan (C‑34/17, EU:C:2018:282).

⁴⁶ Such as, for example, the issue of the detailed calculation of the deductible proportion, as illustrated by the parties according to their line of argument.

⁴⁷ Save in the case of the exceptions laid down in Article 17(3)(b) and (c) of the Sixth Directive and Article 169(b) and (c) of Directive 2006/112.

⁴⁸ Emphasis added.

⁴⁹ See judgment of 16 June 2016, Kreissparkasse Wiedenbrück (C‑186/15, EU:C:2016:452, paragraph 31).

⁵⁰ Judgment of 16 June 2016, Kreissparkasse Wiedenbrück (C‑186/15, EU:C:2016:452, paragraph 32).

⁵¹ By virtue of the option exercised in France by the branch.

⁵² See ruling No 2010/03 (VAT) of 14 September 2010, BOI-TVA-SECT‑50-10-30, No 140. See also, in this regard, Pottier, E., ‘Avancées notables en matière de droit à déduction de la TVA pour les succursales françaises d’entreprises étrangères réalisant des opérations bancaires et financières: la saga Morgan Stanley’, Revue internationale des services financiers, No 2, 2017, p. 132.

⁵³ Morgan Stanley refers, in this regard, to the judgments of 22 February 2001, Abbey National (C‑408/98, EU:C:2001:110, paragraphs 34 to 36); of 26 May 2005, Kretztechnik (C‑465/03, EU:C:2005:320, paragraph 36); and of 29 October 2009, SKF (C‑29/08, EU:C:2009:665, paragraphs 57 to 60).

⁵⁴ See, to that effect, inter alia, judgments of 29 October 2009, SKF (C‑29/08, EU:C:2009:665, paragraphs 57 and 58); of 16 July 2015, Larentia + Minerva and Marenave Schiffahrt (C‑108/14 and C‑109/14, EU:C:2015:496, paragraphs 23 and 24); and of 14 September 2017, Iberdrola Inmobiliaria Real Estate Investments (C‑132/16, EU:C:2017:683, paragraphs 28 and 29). In addition, I note that, in the judgment of 13 July 2000, Monte Dei Paschi Di Siena (C‑136/99, EU:C:2000:408, paragraphs 12, 15, 28 and 29), the Court found there to be a right to a (partial) refund of the VAT paid in France on the expenditure incurred by the taxable person, established in Italy, for the purposes of setting up its representative office in France, the activities of which contributed without distinction to exempt and taxable transactions of the taxable person in Italy; in the view of the Court, the amount of the refund must thus be determined applying the deductible proportion provided for in Article 19 of the Sixth Directive (which corresponds to Article 174 of Directive 2006/112), adjusted if necessary by reference to the transactions which would give rise to a right of deduction if they had been carried out in the Member State of refund (namely, in that case, France).

⁵⁵ See, in this regard, points 94 to 99 of this Opinion.

⁵⁶ On the basis — I reiterate — of the option exercised by that branch in that Member State.

⁵⁷ In accordance with Article 17(3)(a) and (5) and Article 19(1) of the Sixth Directive and with Articles 169(a), 173(1) and 174(1) of Directive 2006/112.