VAT Treatment of Business Transfers

An individual entrepreneur leased developed real estate subject to VAT and transferred these properties to a limited liability company (GmbH). The contribution was intended to be carried out under the provisions of the Austrian Reorganization Tax Act (Umgründungssteuergesetz) and, therefore, to qualify as a transaction outside the scope of VAT.

However, the tax authorities denied the application of the Reorganization Tax Act on the grounds that no qualifying business assets were transferred, as the activity constituted mere asset management rather than commercial leasing. Consequently, the transfer of the properties was treated as a VAT-exempt transaction, resulting in the need to adjust the input VAT previously claimed. The individual entrepreneur appealed against this decision.

Decision of the CJEU

The Court of Justice of the European Union (CJEU) clarified that Member States may treat the transfer of a totality of assets or part thereof as if no supply of goods had taken place, meaning that the transfer falls outside the scope of VAT. However, where a Member State has chosen to apply this principle, it may not restrict its application to specific types of transactions.

Member States may depart from the principle of non-supply only where this is necessary to prevent distortions of competition, tax evasion, or tax avoidance. Accordingly, national provisions must not, without objective justification, lead to a restriction of rights granted under EU law.

Implications of the Decision

This decision may have significant practical implications. Should the Austrian Supreme Administrative Court (Verwaltungsgerichtshof, VwGH) follow the CJEU’s ruling and conclude that there is no justification for the current restriction, the principle that such transfers fall outside the scope of VAT would apply to all transfers, whether for consideration or gratuitous, of a totality of assets or part thereof. As a result, input VAT adjustments and deemed supply VAT charges would no longer arise.

A prerequisite for this treatment is that the transferee is an entrepreneur entitled to deduct input VAT and that the economic activity is continued by the transferee.