Morgan Stanley: Input tax recovery by branches 

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17 October 2018

The Advocate General (AG) has handed down his opinion in the Morgan Stanley CJEU case, which considers VAT recovery rules for costs incurred by overseas branches. 

This opinion adds another dimension to Brexit planning, which can involve creating new EU businesses with multiple establishments as well as longstanding multi-establishment arrangements. Whilst the CJEU decision need not follow the opinion of the AG, in most cases it does.

If you operate using overseas branches, then you should consider your VAT recovery position now. Hansuke’s VAT team can help with this.

Key points of the Morgan Stanley case

Morgan Stanley has a branch in France (MSFR) and a head office in the UK (MSUK). MSFR incurred costs in providing services to MSUK and directly to third parties.

MSFR sought to recover all the input VAT on costs incurred by its French branch on its French VAT return, asserting that only its supplies to third parties should be taken into account. 

The French tax authorities disagreed, claiming that input tax incurred on transactions for the benefit of MSUK related to services that are outside the scope of VAT with no recovery right.

The AG considered VAT recovery in relation to expenditure:

  • Used exclusively to support MSUK in carrying out exempt transactions;

  • Used exclusively to support MSUK in carrying out taxable transactions;

  • Used to support MSUK in making exempt and taxable supplies, and;

  • Used by both MSUK and MSFR to allow MSFR to make its own supplies and MSUK to make both taxable and exempt supplies.


The AG stated that:

  • VAT incurred on expenses relating to exempt supplies made outside France is not recoverable and, should be blocked.

  • partial exemption methodology should be used to calculate input VAT recovery in relation to both exempt and taxable supplies, and

  • in respect of costs associated with MSUK’s taxable supplies, the input VAT should be recoverable only if the transaction would have been taxable in both member states. This is the ‘double layer’ test which arises as a result of straddling two different taxation system and answers the question of which country’s recovery rules should be applied.

Ali Kazimi

Managing Director

Tel: +44 (0) 203 865 0626

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