Court of Justice (Fourth Chamber) 24 January 2019, C-165/17 (Morgan Stanley & Co International plc v Ministre de l'Économie et des Finances.)

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In a preliminary ruling concerning VAT deduction rights of a branch (Morgan Stanley's Paris branch) whose expenditure is used for transactions of its principal establishment in another Member State, the Court of Justice (Fourth Chamber) held that expenditure borne exclusively for mixed taxable and exempt transactions of the principal establishment must be subject to a specific deductible proportion whose denominator comprises only the turnover of those transactions and whose numerator includes only taxed transactions for which VAT would also be deductible if carried out in the branch's Member State, including where deductibility arises from the branch's own option to tax. For general costs of the branch used for both its own transactions and those of the principal establishment, the deductible proportion must incorporate in its denominator the transactions of both the branch and the principal establishment, while the numerator must include, alongside the branch's taxed transactions, only those taxed transactions of the principal establishment for which VAT would be deductible if carried out in the branch's State of registration. The Court rejected the approach of applying solely the branch's own deductible proportion to all input expenditure, as this fails to account for the direct and immediate link between that expenditure and the principal establishment's transactions, with which the branch forms a single taxable person.AI