Sale of a business to two purchasers

Facts

A businesswoman intended to gift her entire business to her two daughters, each receiving a 50 per cent share. She did not wish to retain any assets for herself and intended to cease her business activities immediately following the completion of the gift. The daughters jointly ran their own business in the legal form of a general partnership. They planned to incorporate their mother’s business into the assets of the general partnership and to continue its business activities in essentially unchanged form. The question was whether this constituted a transfer of a totality of assets within the meaning of Article 19 of the VAT Directive (implemented in Germany by § 1(1a) of the VAT Act).

General Court ruling

The decisive factor is whether a series of transactions, such as those that took place here, can be classified as a single transaction. This is the case if they objectively constitute a single, inseparable economic transaction, the division of which would be unrealistic. However, this condition is not met in the present case involving the transfer of 50 per cent shares in each instance, because the sisters are separate legal bodies who, with regard to their shares, hold the position of sole owners capable of disposing of them without the consent of the other. Furthermore, each sister is free to decide whether or not to transfer her share to the general partnership. Moreover, the second transfer is not a condition for the first.

The 50 per cent shares are not independent units of the mother company’s assets with which the daughters could each carry out an independent economic activity in their own right. However, a transfer of a totality of assets must enable the acquirer to continue an independent economic activity. As this condition is not met, there is no non-taxable transfer of a totality of assets.

Analysis

As the two sisters’ general partnership (OHG) already existed at the time of the transfer of the mother’s business, the question arises as to why the mother did not transfer the business directly to the OHG. In that case, the transfer of all or part of the assets would have posed no problem (provided there was an intention to continue the business).

In this case, the decisive factor was that no business activity could be continued with the 50 per cent share in the mother’s business. However, there are also conceivable scenarios in which this is possible. In such cases, the next step would be to examine whether the transferees intend to continue the transferor’s business.

Author: Nadia Schulte