The main dispute of this case is the possibility of a taxable person to consolidate at the level of its principal establishment the turnover incurred by its fixed establishments in other Member States / third countries for pro-rata input VAT deduction purposes.

According to CJEU, the taxable person cannot consolidate at the level of its principal establishment the turnover of its fixed establishments, the applicable input VAT deduction system being the one in each state where the taxable person has its principle establishment and, respectively, each fixed establishment.

Therefore, input VAT deduction depends exclusively on the place where the taxable person is established from a VAT perspective, concept which covers not only the principal establishment, but also the fixed establishments. Thus, besides the input VAT deduction system in the Members State of principle establishment, the taxable person is subject to the deduction systems in each state where it has a fixed establishment.

This interpretation applies even if the principal establishment and the fixed establishments are a single taxable person from a VAT perspective, since consolidation at the level of the principal establishment of the turnover incurred by the fixed establishments would jeopardize the rational allocation / territorial application of VAT and, hence, would breach the principle of territoriality (based on which the activities carried out by a taxable person in another state in which it has a fixed establishment are regarded as being exercised from that fixed establishment).

This decision mainly impacts taxable persons which carry out VAT exempt without credit transactions (e.g. financial institutions) which are not able to consolidate at headquarters level the turnover obtained by the fixed establishments from activities carried out with third states in order to increase the overall input VAT deduction pro-rata.

For additional information, please contact:

Venkatesh Srinivasan, Partner – Head of Tax and Legal

Ernst & Young SRL and E. Platis, C. Bazilescu LLLP

15-17 Dr. Ion Mihalache Street

Tower Building, 19th Floor

Sector 1, 011171, Bucharest, Romania

Tel: (40-21) 402 4000, Fax: (40-21) 310 7124

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