France: Value-Added Tax

Last Updated: 8 September 1996
Computation Of The Prorate Of Deduction: Secondary Financial Products

The first decision of the E.C. Court of Justice relating to secondary financial operations likely to be excluded from the computation of the prorate has been made. The decision dated July 11, 1996 refuses the qualification as "secondary" for products of investment of funds of an estate management company.

The E.C. Court of Justice has indeed considered that article 19, paragraph 2, of the sixth VAT directive must be interpreted as the financial products received by an estate management company in remuneration of investments, realized for its own benefit, of funds paid by owners or renters, should be included in the denominator of the part used for the computation of the deduction prorate (CJCE, July 11, 1996).


1. Article 19, paragraph 2, of the sixth VAT directive provides that, for the computation of the deduction prorate of partial liable taxpayers, the amount of the turnover relating to financial and estate secondary operations is excluded. This rules aims at operations being in the field of application of VAT but exempted, and the taking into account of which, in the denominator of the prorate, would decrease the deduction rights of the liable taxpayers.

In France, originally applied by way of an administrative instruction and only for secondary financial receipt not exceeding 5% of the whole receipts, the device of Article 19, paragraph 2, of the sixth directive is now transposed to Article 212, 2-b of Appendix II of the French General Tax Code.

Thus the present decision of the E.C. Court of Justice, relating to the determination of deduction rights of estate management companies receiving advances of funds from investment products, answers to the decision of the Administrative Court of Appeal of Lyon dated October 26, 1994 and which referred to the E.C. Court of Justice the points to know:

  • whether these products belong or not to the field of application of VAT;
  • if yes, whether they constitute or not secondary products of financial operations aimed at by article 19, paragraph 2, of the sixth directive.

2. On the first point, the E.C. Court of Justice positively answers, noticing that the investments interests are the compensation of a capital put at the disposal of a third party and that these services are rendered, in the present case, by a receiver acting as a liable person.

3. On the second point, the Court answers, contrary to the conclusions of the prosecuting counsel, Mr. Lenz, that the collection of investment interests, in the present case corresponding to 14% of the global receipts of the liable taxpayer, constitutes the direct, permanent and necessary continuation of the activity of estate management companies and that such investments should not be qualified as secondary operations, according to article 19, paragraph 2, of the sixth directive.

Therefore, this decision endorses the quality criteria (lack of link with the main activity), retained by the French Regulations in order to define financial secondary operations likely to be excluded from the prorate computation and which, for the Tax Authorities, only financial products resulting from the management of accounts of the company are likely to fulfil (Instr. September 8, 1994).

The Court of Justice even seems to consider this criteria as quite significant.

4. As far as the quantity criteria is concerned (5% ceiling), the E.C. Court of Justice has not been obliged to give its opinion on the accounting of the French rule with the provisions of the sixth directive (for which article 19 does not state any ceiling).

In this respect, it should be noted that the prosecuting counsel had indicated in his conclusions that the rigid ceiling fixed by France, according to which secondary operations should not exceed 5% of the whole receipts of the company, did not seem to be compatible with the objectives of the neutralisation rule of secondary operations provided by article 19, paragraph 2, of the sixth directive.

As a conclusion, in the opinion of the prosecuting counsel, secondary operations are characterized as follows: "they have a link with the activity of the liable taxpayer, but they are no longer directly depending on this activity; they only use goods necessary to the activity of the company in a low proportion; their importance should not exceed the main activity of the company".

5. Lastly, it is to be noted that this decision including the years 1983 to 1986 remains interesting under article 212 of appendix II of the French General Tax Code coming from the decision no. 94-452 dated June 3, 1994, and whose point 2 b states the principle of the non-taking into account, in the denominator of the prorate of the product of secondary financial and estate operations exempted not exceeding 5% of the whole receipts of the liable taxpayer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be brought about your specific circumstances.

For additional information contact Claire Acard on 33/(1)/55 61 10 10, Lionel Benant on 33/, Joel Fischer on 33/, or Laurent Borey on 33/(1)55 61 10 10 or enter text search: "Archibald Andersen Profile".

The members of Archibald Andersen Association d'Avocats (S.G. Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar and the Lyon Bar.

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