Most multinationals know the difference between a branch and a subsidiary from a corporate law perspective. Fewer realise how dramatically that distinction affects their VAT position, and specifically, how much recoverable VAT they may be leaving on the table because of it.
The VAT treatment of transactions between a head office and its branch is fundamentally different from the treatment of transactions between a parent company and its subsidiary. Getting that distinction wrong does not just create compliance risk. It directly affects how much input VAT your business can recover, whether internal cost allocations are taxable supplies, and whether your current structure is creating VAT exposure you have not identified.
A branch is not a separate legal entity. It is an extension of the head office, operating in another jurisdiction as part of the same company. For VAT purposes, the head office and its branch are a single taxable person.
A subsidiary is incorporated as an independent legal entity under local law, owned or controlled by a parent company. For VAT purposes, it is a completely separate taxable person. Transactions between a parent and its subsidiary are taxable supplies, subject to normal VAT rules, and require proper invoicing.
This distinction sounds straightforward. In practice, the VAT consequences that flow from it are not, and the errors that arise from misunderstanding it tend to be systematic, meaning they compound across every transaction in every period until they are identified.
The foundational rule for head office and branch relationships comes from the CJEU’s FCE Bank decision in 2006. The court confirmed that services supplied by a head office to its branch cannot be treated as taxable supplies for VAT, even where the cost has been formally allocated to the branch.
The reasoning is straightforward: a head office and its branch are the same legal entity. They cannot supply services to themselves in any meaningful sense. The branch bears no independent economic risk and has no separate legal personality. Internal cost allocations between them, management fees, IT recharges, shared service costs, fall outside the scope of VAT entirely. No invoice is required. No VAT is charged or reclaimed.
For businesses with significant intercompany service flows between a head office and its branches, this is the starting point for understanding the VAT position. Where internal allocations have been invoiced and VAT has been charged unnecessarily, there may be a correction and recovery opportunity.
For a broader overview of VAT compliance obligations for businesses operating across multiple jurisdictions, see our VAT compliance guide.
The FCE Bank principle holds, unless either the head office or the branch belongs to a VAT group.
In the Skandia case in 2014, the CJEU held that where a branch is a member of a local VAT group, it is treated as a separate taxable person from its non-grouped head office. The VAT group, as an entity, is distinct from the head office. That means transactions between the non-grouped head office and the VAT-grouped branch are taxable supplies. The branch, or more precisely the VAT group, must account for VAT under the reverse charge mechanism.
The Danske Bank decision in 2021 confirmed the same principle applies in reverse. Where the head office is a member of a VAT group but the branch is not, their transactions are also taxable. The rule operates symmetrically.
For financial services groups and other businesses operating through extensive branch networks across multiple EU member states, with partial VAT group memberships in some countries and not others, this creates a complex map of which internal flows are outside scope and which are taxable. Getting it wrong creates both under-declared VAT and unnecessary VAT costs on flows that should have been outside scope.
One of the most persistent misconceptions in international VAT planning is the idea that a subsidiary providing services exclusively or primarily for a foreign parent could constitute a fixed establishment of that parent in the local jurisdiction.
The CJEU has addressed this question repeatedly over the past four years, and the answer is now firmly settled. In Berlin Chemie (2022), Cabot Plastics (2023), and Adient (2024), the court confirmed on each occasion that a subsidiary’s resources are its own resources. They are not at the disposal of the parent in the sense required to constitute a fixed establishment. Group affiliation and exclusive service contracts are not enough.
This matters for VAT reclaim in a specific way. Where a tax authority asserts that a foreign parent has a fixed establishment through its local subsidiary, that assertion can affect the VAT registration obligations of the foreign entity, the place of supply of services provided to it, and the input VAT recovery position of both entities. Businesses that have received fixed establishment assessments from tax authorities in Belgium, France, Romania, or Poland in particular should review those positions against the most recent CJEU case law, which has progressively narrowed the circumstances in which a subsidiary can constitute an establishment of its parent.
For branches that conduct activities both for their own account and on behalf of the head office, the input VAT recovery question is more nuanced than it appears.
The CJEU’s Morgan Stanley decision established the methodology. Costs that relate exclusively to the branch’s own taxable activities are fully recoverable. Costs that relate to activities performed for the head office must be apportioned using the head office’s own recovery ratio, but only where those activities would give rise to recovery rights in the branch’s member state.
For businesses in financial services, insurance, or any sector where the head office makes a mixture of taxable and exempt supplies, this methodology requires a specific pro-rata calculation that many branches have not formally implemented. Where costs have been fully recovered without applying the Morgan Stanley apportionment, there is a compliance exposure. Where the head office’s recovery ratio is favourable and the branch has been applying a more conservative approach, there may be an unclaimed recovery opportunity.
The calculation is fact-specific and requires a clear understanding of which costs serve which activities. It is one of the most commonly missed areas of input VAT optimisation for multinational businesses operating through branch structures.
The mistakes that arise most frequently in this area follow predictable patterns.
Invoicing internal allocations when no invoice is needed: Where head office to branch recharges are genuinely within FCE Bank, issuing a VAT invoice creates an unnecessary compliance obligation and potentially triggers incorrect input VAT claims. The reverse also occurs: where Skandia applies and a proper invoice with a reverse charge reference is required, the absence of that documentation creates a different compliance gap.
Assuming all intercompany flows are the same: ERP systems that treat all intercompany transactions identically, regardless of whether they are internal allocations, Skandia-triggered taxable supplies, or normal parent-subsidiary transactions, create systematic errors that are difficult to unwind and only surface during audits.
Not reviewing the position when VAT group memberships change: A business that joins or leaves a VAT group in one jurisdiction changes the VAT treatment of its transactions with branch counterparts in other jurisdictions. The operational implications of that change are often not picked up in real time.
Conflating corporate tax permanent establishment with VAT fixed establishment. These are distinct concepts with different criteria. A corporate tax PE can exist without a VAT fixed establishment and vice versa. Businesses that have identified a PE exposure should not assume the VAT position is identical, and vice versa.
If your business has head office to branch flows, VAT group memberships in some but not all jurisdictions, or subsidiaries providing services to foreign group companies, the following are worth reviewing:
For businesses that have not reviewed their intercompany VAT position recently, the accumulated exposure from systematic misclassification can be significant. The recovery opportunity, where misclassification has resulted in under-claimed input VAT, can be equally significant.
1. What is the difference between a branch and a subsidiary for VAT purposes?
A branch is part of the same legal entity as its head office. They are treated as a single taxable person for VAT, meaning internal transactions between them are generally outside the scope of VAT under the FCE Bank principle. A subsidiary is a separate legal entity and a separate taxable person. Transactions between a parent company and its subsidiary are taxable supplies subject to normal VAT rules and require proper invoicing.
2. When do head office to branch transactions become taxable?
Under the Skandia and Danske Bank decisions, transactions between a head office and its branch become taxable where either party is a member of a VAT group and the other is not. The VAT group is treated as a separate taxable person from the non-grouped establishment, meaning their transactions are taxable supplies subject to reverse charge. This applies symmetrically regardless of which entity, the head office or the branch, is VAT-grouped.
3. Can a subsidiary ever be treated as a fixed establishment of its parent?
In practice, very rarely. The CJEU has confirmed in a series of rulings from 2022 to 2024, including Berlin Chemie, Cabot Plastics, and Adient, that a subsidiary’s resources are its own and are not at the disposal of the parent in the sense required to constitute a fixed establishment. Group affiliation and exclusive service contracts are not sufficient. The circumstances where a subsidiary could constitute an FE are now extremely narrow.
4. How does input VAT recovery work for a branch that performs activities for both itself and its head office?
The Morgan Stanley formula applies. Input VAT on costs relating exclusively to the branch’s own taxable activities is fully recoverable. Input VAT on costs relating to activities performed for the head office must be apportioned using the head office’s recovery ratio, but only where those activities would give rise to recovery rights in the branch’s jurisdiction. This requires a specific pro-rata calculation that many branches have not formally implemented.
5.Does a corporate tax permanent establishment automatically mean there is a VAT fixed establishment?
No. These are distinct legal concepts with different criteria under different legal frameworks. A corporate tax permanent establishment can exist without a VAT fixed establishment, and a VAT fixed establishment can exist without a corporate tax PE. Businesses that have identified one type of establishment should assess the other independently rather than assuming the conclusions carry over.
The VAT treatment of head office to branch transactions, VAT group memberships, and intercompany service flows is one of the most technically complex areas of indirect tax, and one of the most commonly reviewed areas during multinational VAT audits.
VAT IT works with businesses to review intercompany VAT structures, identify recovery opportunities, and ensure that internal transaction flows are correctly classified and documented.
Get in touch with our team to find out what your current structure means for your VAT recovery position.
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