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Business Restructuring—VAT Treatment of Transfer of a Going Concern

Dec. 27, 2021, 8:00 AM

Article 19 of Council Directive 2006/112/EC of November 28, 2006 (the VAT Directive) allows EU member states to treat the transfer of a going concern (TOGC), or a part of a going concern, as not relevant for VAT purposes. All member states have taken up that option, at least to some extent.

While the scope of application of this provision seems relatively clear in the different member states, the VAT treatment of cross-border TOGC is not yet resolved.

European Position on Scope of Transfer of a Going Concern Regime

Option Offered by the VAT Directive

In principle, supplies of goods and services for consideration by a taxable person acting as such are subject to VAT (article 2 of the VAT Directive).

However, article 19 of the VAT Directive provides that EU member states may consider that, in the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, no supply of goods has taken place and that the person to whom the goods are transferred is to be treated as the successor to the transferor.

Member states may, in cases where the recipient is not wholly liable to tax, take the measures necessary to prevent distortion of competition. They may also adopt any measures needed to prevent tax evasion or avoidance through the use of article 19.

All member states have used the possibility offered by the VAT Directive to consider that, following a transfer, no supply of goods for the purposes of VAT has taken place. However, as explored below, some member states have had different interpretations of the scope of these provisions and how they affect cross-border transfers .

Interpretation of the Court of Justice of the EU

According to the Court of Justice of the EU (CJEU) in the Zita Modes SARL case (C-497/01, Nov. 27, 2003), article 5(8) of the Sixth Directive 77/388 (which became Article 19 of the VAT Directive) must be interpreted as meaning that the no-supply rule applies to any transfer of a business or an independent part of an undertaking, including tangible elements and, as the case may be, intangible elements which, together, constitute an undertaking or a part of an undertaking capable of carrying on an independent economic activity.

The transferee must however intend to operate the business or the part of the undertaking transferred and not simply to immediately liquidate the activity concerned and sell the stock, if any.

On the other hand, the CJEU adds that nothing in article 5(8) of the Sixth Directive requires that the transferee pursue prior to the transfer the same type of economic activity as the transferor.

Applying principles set out in the Zita case, the Court considers that there is a transfer of a totality of assets, or a part thereof, not subject to VAT, where the stock and fittings of a retail outlet are transferred concomitantly with the conclusion of a contract of lease, to the transferee, of the premises of that outlet for an indefinite period but terminable at short notice by either party, provided that the assets transferred are sufficient for the transferee to be able to carry on an independent economic activity on a lasting basis (see Finanzamt Lüdenscheid (Case C-444/10) Nov. 10, 2011).

The type of assets that have to be transferred to consider the transfer as a TOGC for VAT purposes depends on the nature of the activity performed.

Application in Italy, the Netherlands and France Regarding Scope of TOGC Regime

Italy

Article 19 of the VAT Directive has been implemented in Italy in article 2, paragraph 3(b), of the Italian VAT Code (the IVC).

Based on the abovementioned rule, the transfer of a going concern, or a part of a going concern, is not relevant for VAT purposes (but is liable to proportional registration tax).

However, many principles have been stated by the Italian Revenue Agency and the Italian tax courts on the application of such regime, also following the CJEU principles.

First, it has been clarified that article 2, paragraph 3(b) of the IVC applies in the case of a TOGC that is related to a reorganization of business that must be carried on. It is not relevant—and accordingly the ordinary VAT rules apply—where the TOGC is ended, for example, in order to liquidate the assets once they are received by the transferee.

Further, the rule in article 2, paragraph 3(b) applies to the transfer of a portion of a going concern, meaning that a certain amount of material and/or immaterial goods are deemed to be considered as a going concern in the event that they are together organized and intended to be implemented with other goods by the transferee in order to create a unique operative going concern.

In other words, a general and deep evaluation of the whole situation and of the use of the relevant assets must be performed in order to verify whether, in the circumstances of that specific case, the scope of the rule is really met.

In this regard, it is relevant that the transferred goods represent—together with the other goods of the transferee—an “organized and operative” going concern. The same principles also apply in the case of many transfers of single goods that were part of a going concern and are de facto ended to constitute the same going concern at the level of the transferee.

The circumstance represented in the above paragraph is particularly interesting for stakeholders because tax assessments of the Italian Revenue Agency on indirect taxation of TOGCs are mainly focused on the fact that the transferred goods are deemed to be a—total or partial—going concern (liable to proportional registration tax) or not (in which case VAT would be applicable).

The Netherlands

The Netherlands has implemented article 19 of the VAT Directive in article 37d of the Dutch Turnover Tax Act 1968 (TTA). Article 37d applies in the event of a transfer of a totality of assets or part thereof, resulting in no levy of VAT on the transfer under certain conditions (most importantly: continuation of the transferred business).

  • The purchaser of the assets is deemed to carry on the VAT position of the seller in respect of the transferred business. Ongoing VAT revision periods, options for rent subject to VAT, and specific agreements with the tax authorities with respect to the transferred assets (if any) are consequently continued by the purchaser. In this respect, it is important to note that it is essential to carry out a thorough due diligence investigation into the VAT history of the transferred business. The purchaser generally cannot be held liable for VAT which remains unpaid by the seller and which relates to the period prior to the transfer date. However, the purchaser is liable for adjustment VAT in respect of the current fiscal year.
  • Although the exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis is regarded as an economic activity under article 9 of the VAT Directive, the mere transfer of a leased-out building was not considered to qualify under the Dutch TOGC regime until 2008.

Contrary to its previous decisions in similar cases, in 2008 the Dutch Supreme Court ruled that the TOGC regime does apply to the transfer of leased-out real estate, provided that the seller held the immovable property for investment purposes and the purchaser continued the seller’s investment activities.

If, for instance, a real estate developer transfers a newly developed or redeveloped building to an investor, article 37d of the TTA generally does not apply. According to the Dutch Supreme Court the immovable property should, at the level of the developer, be regarded as “stock-in-trade” rather than an operated business asset, irrespective of whether—in view of the transaction with the investor—the developer has entered into a lease agreement in respect of the property prior to the transaction date. This position has been challenged several times since 2008, but in all cases the Supreme Court and/or lower courts have reconfirmed their approach.

Similarly, the Supreme Court ruled in early 2021 that a sale-and-leaseback transaction did not qualify as a TOGC, since after the transaction the seller effectively continued its previous business. The sale-and-leaseback merely resulted in the circumstance that the seller was no longer the owner but the lessee of its real estate.

France

Initially used for capital restructuring operations (e.g., mergers), this regime has been extended by the French tax authorities (FTA) to apply to real estate sales operations under certain conditions.

Article 19 of the VAT Directive was implemented in France through article 257 bis of the French Tax Code (FTC) in 2005 and then modified in 2010.

According to article 257 bis of the FTC, VAT is not due on deliveries of goods or services performed between two VAT taxable persons in the event of a transfer for consideration or not, or as a contribution to a company, of a totality of assets or part thereof. The beneficiary of the transfer is deemed to continue as the person of the transferor and, notably, has to perform input VAT regularization (provided for in article 207 of Appendix II of the FTC) that would be required if the transferor had continued its operations.

According to FTA guidelines, there is no obligation to formalize the successor’s commitment to regularize the right of deduction previously exercised by the transferor, since this commitment results from the law.

Article 257 bis of the FTC applies as of right when conditions laid down in in that article are met.

The FTA guidelines also provide that the scope of article 257 bis of the FTC includes the transfer of a coherent body of assets capable of allowing the pursuit of an economic activity. This provision applies to any transfer of business or an independent part of an undertaking, including tangible elements and intangible elements, which together constitute an undertaking or a part of an undertaking capable of carrying on an independent economic activity.

The French regime requires a condition not provided for in article 19 of the VAT Directive: The transfer should take place between two partially or totally VAT taxable persons in respect of the assets transferred.

Concerning the nature of assets transferred, the FTA have a broad interpretation of article 19 of the VAT Directive. According to the FTA (referring to a tax ruling), this provision applies to the sale of a fixed property, recorded as a fixed asset for both parties, used for a rental activity subject to VAT where the transferee continues to use the property for a rental activity subject to VAT, as of right or by option.

In this situation, the transfer of the property is (i) not subject to input VAT adjustments if the building is qualified as old (i.e. completed for more than five years), or (ii) exempt from VAT if the building is qualified as new (i.e. completed within less than five years).

This regime is regularly used in the context of real estate as it avoids a cash out for the operators.

Territoriality and Transfers of a Going Concern

In principle, the TOGC regime does not apply on cross-border transfers because the implementation of article 19 of the VAT Directive is up to the discretion of member states.

However, all member states have implemented article 19 to a certain extent, and as a result, we believe that the TOGC regime could be applicable on cross-border transfers.

Although, as mentioned above, member states may take measures to prevent tax evasion or avoidance through the use of article 19, which could lead to mismatches between the member states regarding the application of the TOGC regime, the CJEU has ruled in several cases that the VAT Directive limits the interpretative margin by its aim and purpose. It is not desirable that excessive differences between member states exist in the interpretation of concepts and the application of certain rules and/or legislation, especially where such differences could lead to distortion of competition.

It remains unclear whether the TOGC regime applies to foreign assets which are part of a business transfer between two local VAT entrepreneurs.

It could be argued that the foreign assets are part of the totality of assets that is transferred and hence fall within the scope of the TOGC. However, the question that subsequently arises is whether the foreign member state in which the assets are located also considers the assets to be part of a totality of assets. A member state’s legal definition of the local TOGC concept could lead to such “stand-alone” assets falling outside the scope of the TOGC regime, hence triggering VAT in the member state where the assets are located.

In the Netherlands and France, no guidelines have been published on the TOGC regime applicable to cross-border transfers.

In Italy, by contrast, the Italian Revenue Agency, in Resolution No. 536 of Aug. 6, 2021, clarified that article 19 of the VAT Directive is an option for each member state which can only be applied in the case of a TOGC, or a part of it, located in the member state. In the case under analysis, it was an actual TOGC between foreign companies and only one asset of the going concern was located in Italy. Based on this circumstance, as it was not possible to consider the Italian asset in itself as a going concern, or part of it, the Italian Revenue Agency stated that the transfer of such asset, regardless of what happened outside of Italy, could not be considered a TOGC for VAT purposes, and that, consequently, ordinary VAT in Italy applied.

Article 19 of the VAT Directive is frequently used by operators as it offers a significant cash flow advantage. However, depending on the jurisdiction, it is difficult to apply this VAT regime to cross-border transactions, which is unfortunate because this creates legal uncertainty.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Armelle Abadie is a partner and Hélène Brin is an associate with CMS France; Berardo Lanci is a partner with CMS Italy; Etienne Cox is counsel and Puck Wilmink is junior associate with CMS Netherlands.

The authors may be contacted at: armelle.abadie@cms-fl.com; berardo.lanci@cms-aacs.com; etienne.cox@cms-dsb.com; puck.wilmink@cms-dsb.com; helene.brin@cms-fl.com