Sale of a business where a tenant continues operations

Facts

The claimant operated a fish processing business, a fish farm, a farm shop and a restaurant. He sold land comprising restaurant, shop and residential buildings, as well as concrete tanks and movable fixtures, to A and B in equal shares. He assigned to A and B the rights and claims arising from a water law permit for the operation of the fish farm and from agreements with neighbouring landowners. The same applied to easements relating to water abstraction for the supply of the fish farm. The claimant agreed with A and B that they would continue to supply the claimant with fish, which they did following the transfer of ownership on 1 January 2017.

In May 2017, A and B leased the fish farm, including the buildings and fish tanks, as well as the rights arising from the water law permit, to a limited liability company (GmbH) founded on 31 January 2017 and entered in the commercial register on 21 February 2017, of which they were shareholders alongside other persons. The lease agreement was to apply retroactively from 1 January 2017.

BFH ruling

The Federal Fiscal Court (BFH) first clarified that, in the case of a multiple transfer, it is not the intermediate acquirer who must intend to continue the business, but the final acquirer. However, an intention to continue the business on the part of a third party who is not the beneficiary of the transfer is not sufficient. This was the case here, however, as the GmbH was not the beneficiary of the transfer by the plaintiff, but merely the lessee of the two beneficiaries, A and B.

The BFH refers the matter back to the Fiscal Court as further findings of fact are required. The senate points out that the intended retroactive effect of the lease agreement is irrelevant for VAT purposes. It must therefore be examined who continued the business between the date of the transfer and the incorporation of the GmbH. If, for example, A had continued the business with B’s approval, there could be a business transfer between the claimant and A.

Analysis

This case demonstrates how disastrous it can be to take the wrong approach under VAT law. Basing the assessment on the GmbH’s intention to continue operations was a misguided approach, which resulted in the actual question of whether A and B intended to continue operations remaining unresolved. This must now be rectified by the fiscal court, which will significantly delay the resolution of the case.

This judgment is one of two on the subject of business transfers published on the same day. Information on the decision V R 24/24 can be found here.

Author: Nadia Schulte