The German Federal Tax Court (BFH) has submitted to the European Court of Justice (ECJ) the question whether the whole transaction qualifies as a taxable turnover if business premises are not sold, but only leased to the acquirer at the occasion of the sale of the business ( C-444/10).

Up to now non-VATable

Hitherto, according to the prevailing opinion, one could assume that the sale of a business as a whole is also non-VATable if single material elements of the business were not sold and transferred, but only leased to the acquirer for a longer period of time. This interpretation now seems doubtful.

The Submitted Case

The case, which is subject to the submission by the BFH ( XI R 27/08), refers to the sale of a retailer business for sports products, which was run by the entrepreneur in his own business premises. The business premises remained in the ownership of the seller. They were merely leased to the acquirer via a lease agreement valid for an indefinite period of time.

Sale of a Business as a Whole non-VATable

The sale of a business as a whole by an entrepreneur to another entrepreneur for his enterprise is generally not subject to VAT. This exception is laid down in Section 1 (1a) UStG (German VAT Act). This rule is based on the implementation of an EU directive (Article 19 of the VAT Common System Directive 2006/112/EC).

Therefore, the ECJ is the competent court to decide whether the interpretation of this directive allows for certain material business elements to only be leased, but not sold and transferred to the acquirer.

According to the BFH, the ECJ should further decide (if the simple lease is sufficient) whether the lease contract running for an indefinite period of time, which can be terminated by an ordinary notice of cancellation, is sufficient or whether the lease contract must be concluded for a fixed long period of time from the outset.

Consequences for Transactions

Hitherto, VAT was not a major issue in asset deals. Even if the ownership of the business premises remained with the seller, the qualification as VATable turnover could be avoided by the conclusion of lease agreements. In the future the parties of the SPA will have to be more cautious.

If the ECJ holds that a simple lease is not sufficient, the question might arise who bears the VAT if the sale of the business, contrary to the assumptions of the parties, is subject to VAT.

If there is no explicit clause in the SPA, the purchase price mentioned will regularly have to be understood as the gross purchase price. In this case the VAT must be extracted from the gross amount and paid to the tax authority by the seller. As a consequence his earnings are reduced.

From the perspective of the seller it is therefore highly recommended to include a provision in the SPA, according to which the purchase price is increased by a potential VAT.

For the acquirer, the qualification of an asset deal as a VATable turnover is not necessarily a disadvantage if he can completely deduct the VAT shown in the invoice of the seller as input VAT. However, if the acquirer is a financial institution or another entrepreneur, who is not completely entitled to the deduction of input VAT, the VAT is insofar definitive.

It must now be awaited how the ECJ will decide. The average duration of ECJ proceedings amounts to roughly one and a half years. Prior to this, however, a certain tendency how the ECJ will decide might be seen in the opinion of the Advocate General, as the Court often shares the Advocate General’s point of view.

If you would like more information about the foregoing, please contact the authors of this Legal Update Dr. Petra Eckl (Tax) at +49 69 79 41 1311 or Friedrich Merz at +49 30 20 67 30 110, Christof Gaudig at +49 221 57 71 224 or Stephan Gittermann at +49 69 7941 1681 (all Corporate).