The Lyon Administrative Court of Appeal decided on 26 October 1994 to appeal to the European Court of Justice for a decision on whether cash interest income representing 14 % of the total turnover of a company is within the scope of VAT and, if it should be regarded as within the scope of VAT, whether it must be excluded from the calculation of the VAT deductible proportion on the basis of Article 19 of the 6th Directive of the Council of the European Communities dated of 17 May 1977, which provides that the income from incidental financial operations not subject to VAT has to be excluded from the calculation of the VAT deductible proportion.

This decision is a consequence of major changes in the French VAT system following several decisions of the European Court of Justice (especially the SATAM decision of 22 June 1993) and the French Administrative Supreme Court. The Instruction of 8 September 1994 issued by the Tax Authorities has thus clarified the newly applicable tax regime and in particular the new determination of the VAT deductible proportion. However, grey areas still remain with respect to the VAT treatment of the income from financial operations not subject to VAT. The current French regulations provide that it can be excluded from the VAT deductible proportion if such operations are incidental and if they do not exceed 5 % of the general turnover of the business. The issue raised by the Lyon Court of Appeal is whether this national regulation complies with the European 6th directive.

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