Restrictions on the sale of a business as a whole

Facts

The Austrian taxable person F R owned several properties and let them, opting out of the VAT exemption. He contributed the properties to a limited liability company (GmbH) – of which he was the sole shareholder and managing director – without receiving new shares in return. The GmbH subsequently let out the properties, also on a VAT taxable basis. F R treated the transfer as non-taxable, relying on Article 19 of the VAT Directive, according to which, amongst other things, the transfer of a totality of assets, whether for consideration or free of charge, may be treated as if no supply of goods had taken place – in German law, this is referred to as the ‘sale of a business as a whole’.

The ‘sale of a business as a whole’ is regulated in Austria by the Reorganisation Tax Act. It contains the restriction that only assets from which commercial income, but not investment income within the meaning of the Income Tax Act, is derived are covered. The tax office regarded the transaction as taxable because letting was considered an investment activity.

ECJ ruling

Following a referral from the Austrian Administrative Court, the General Court first considered whether Austria is entitled to restrict the exemption from taxation on the transfer of a totality of assets in this manner. The question arose because the introduction of the exemption constitutes an option for Member States: if Austria is under no obligation whatsoever to provide for this exemption, is it then perhaps entitled to restrict the exemption at its discretion? The General Court ruled that, where the option is exercised, only restrictions provided for in Article 19(2) of the VAT Directive are permissible, namely measures to prevent distortions of competition or tax evasion. The restriction to commercial income is therefore impermissible.

Article 19(1) of the VAT Directive also has direct effect. This applies despite the fact that non-taxation is a discretionary option: if the Member State has exercised that discretion but has imposed impermissible restrictions, the taxable person may rely directly on the VAT Directive.

There was no regular supply within the meaning of Article 2(1)(a) of the VAT Directive, because the transfer was not made for consideration.

The General Court then examined whether the transfer was subject to the taxation of transfers made free of charge under Article 16(1) of the VAT Directive. This was the case because, firstly, the transfer had been for no consideration, as no new shares had been granted in return. Secondly, F R had deducted input VAT in respect of the property.

Analysis

The General Court confined itself to answering the questions referred to it. It found that, in the absence of consideration, the contribution does not constitute a supply for consideration but, in principle, fulfils the criteria of Article 16 of the VAT Directive. Whether the specific contribution is ultimately to be treated as a non-taxable transfer of all or part of an asset depends on whether all the conditions of Article 19 of the VAT Directive are met. This is a matter for the national court to examine. Under German law, there is no comparable restriction based on the type of income. However, whether a non-taxable transfer of a business as a whole is present in a specific case must still be assessed on the basis of the conditions set out in Section 1(1a) of the German Value Added Tax Act (UStG).

Author: Nadia Schulte