The transfer of a business or a separately managed operation may be classified, for VAT purposes, as a transfer of a going concern. If a transfer of a going concern is present, the transaction is not subject to VAT – no VAT is charged. However, sec. 1 para. 1 a of the German VAT Act entails significant risks if its conditions are not met or if the tax authorities assess the transaction differently.
The following questions regularly arise:
When does a transfer of a going concern exist?
What are the conditions for a transfer of a going concern?
How should the transfer of leased real estate be assessed?
Can the sale of shares in a company also constitute a transfer of a going concern?
What applies to transfers from or into a VAT group?
What are the VAT consequences of a transfer of a going concern?
How should the seller’s input VAT deduction be treated?
Why are specific contractual provisions, regarding a transfer of a going concern, necessary?
What is a transfer of a going concern?
According to sec. 1 para. 1 a of the German VAT Act, a transfer of a going concern exists when the essential foundations of a business are transferred to another taxable person, and respective person/the transferee continues the activity. It is irrelevant whether the purchaser is already a taxable person or becomes one as a result of the acquisition (sec. 1.5 para. 1 sentence 1 of the German Administrative VAT Guidelines).
Even transfers without consideration may constitute a transfer of a going concern, provided the activity is continued. If such a transfer does not meet the conditions of a transfer of a going concern, it may instead be considered a taxable supply without consideration (sec. 1.5 para. 8 of the German Administrative VAT Guidelines). A transfer of a going concern results in a transaction-specific succession of rights for VAT purposes (sec. 1 para. 1 a sentence 3 of the German VAT Act). This means the purchaser follows in certain VAT positions previously occupied by the seller, for example, regarding input VAT adjustments under sec. 15 a of the German VAT Act.
What are the conditions for a transfer of a going concern?
For sec. 1 para. 1 a of the German VAT Act to apply, the following conditions must be met:
Transfer of a business or a separately managed operation, as a whole: This also includes partial operations, provided they constitute an economically independent unit.
The transfer must be made to another taxable person: The purchaser must be a taxable person or become one through the acquisition.
The business transferred must become the purchaser’s business: The purchaser must intend to continue the activity. Immediate liquidation excludes the application.
The business must be transferred to a single purchaser: The transfer must be made to one and the same taxable person. If there are multiple purchasers, each transaction must be assessed separately. In such cases, multiple transfers of a going concern may exist.
Whether a transfer of a going concern actually exists depends on an overall assessment of the transferred assets and the intended activity of the purchaser (sec. 1.5 para. 1 sentence 3 of the German Administrative VAT Guidelines). The decisive factor is whether the transferred business assets form a sufficiently complete whole that enables the performance of an economic activity (sec. 1.5 para. 4 sentence 1 of the German Administrative VAT Guidelines). What matters is not the transfer of legal ownership under civil law, but the VAT-related power of disposal.
It is necessary to transfer a business operation with tangible and, if applicable, intangible components that together enable the carrying out of an independent economic activity. The mere transfer of individual items, such as inventory, is not sufficient. The purchaser must also intend to continue the previous activity. This intention must be supported by objective evidence, such as entering into existing contracts or continuing the business under similar conditions. The activities carried out before and after the transfer must be sufficiently similar. An identical business activity is not required, but economic continuity must be recognizable (sec. 1.5 para. 1 sentence 3 of the German Administrative VAT Guidelines).
When does the transfer of a leased property constitute a transfer of a going concern?
The transfer of a leased or rented property may constitute a non-taxable transfer of a going concern. The decisive factor is not the transfer of legal ownership under civil law, but the continuation of the leasing activity for VAT purposes. A transfer of a going concern exists if the purchaser enters into existing lease agreements or immediately concludes new lease agreements that continue the previous leasing activity (sec. 1.5 para. 2 sentence 1 of the German Administrative VAT Guidelines). A transfer of a going concern may also exist in the case of partially leased properties, provided the unused areas are intended for leasing and there is a corresponding intention to continue the activity (sec. 1.5 para. 2b sentence 1 of the German Administrative VAT Guidelines).
The duration of the leasing activity is particularly important: According to the case law of the Federal Fiscal Court, a sustainable leasing activity is assumed with a leasing period of 17 months. The tax authorities presume sustainability from a period of six months, based on a rebuttable presumption (sec. 1.5 para. 2 sentence 4 of the German Administrative VAT Guidelines).
Even the transfer of only part of a leased building may constitute a transfer of a going concern, if the respective part leased forms an economically independent unit and the leasing activity is continued. However, if the property is transferred to the previous tenant, who intends to use it for his own purposes, no transfer of a going concern exists (sec. 1.5 para. 2 a sentence 3 of the German Administrative VAT Guidelines).
Can the sale of a company share constitute a transfer of a going concern?
The mere sale of company shares, such as in the context of a share deal, generally does not constitute a transfer of a going concern. Company shares are not business assets of the enterprise; they merely represent participation in the company. The typical case of a non-taxable transfer of a going concern is therefore the asset deal, in which assets are directly transferred.
However, a transfer of shares may, exceptionally, be treated as a transfer of a going concern if the share(s) represent part of an independent economic unit that enables a separate economic activity, and the respective activity is actually continued by the purchaser (sec. 1.5 para. 9 sentence 1 of the German Administrative VAT Guidelines).
Even the complete transfer of all shares (100%) is not sufficient, on its own, to constitute a transfer of a going concern. What matters is whether the economic power of disposal over the business is transferred with the share sale and whether the purchaser continues the business activity of the previous shareholder. According to the case law of the Court of Justice of the European Union, a transfer of a going concern, in the context of a share transfer, is only possible “if the holding is part of an independent unit which allows an independent economic activity to be carried out, and that activity is carried on by the transferee.” (Federal Fiscal Court, judgment of 10 December 2020 – V R 5/20, BFHE 271, 288, para. 24; ECJ, judgment of 30 May 2013 – C-651/11 – X, paras. 38 et seq.)
How is a transfer of a going concern assessed in the context of transfers from or into a VAT group?
A VAT group has specific implications for the assessment of non-taxable transfers of a going concern. As a general rule: if a controlled company is transferred out of a VAT group, the controlling company is considered to be the taxable person, within the meaning of sec. 2 para. 1 of the German VAT Act, and is therefore regarded as the seller. However, a transfer of a going concern does not occur if the transfer takes place within the VAT group, as the taxable person remains the same and the transaction is considered an internal supply and, as such, is not subject to VAT.
A transfer of a going concern also generally does not occur if a controlling company acquires a building leased that is leased to its controlled company from a third party and subsequently leases it (as an internal supply) to the controlled company, or vice versa, sells a building leased (as an internal supply) to its controlled company to a third party who then leases it to the controlled company. In these cases, from the perspective of the controlling company, there are no taxable leasing transactions. Rather, the building is used by the controlling company through its controlled company as part of its own business (Federal Fiscal Court, judgment of 6 May 2010 – V R 26/09, BStBl II 2010, 1114, para. 32; judgment of 21 October 2015 – XI R 40/13, BStBl II 2017, 852, para. 63).
The situation is different if a controlling company sells a property, initially leased to a controlled company operating a production facility on it, to that controlled company, and the VAT group is dissolved. In this case, the external business activity of the VAT group consists in operating the production facility, which may be transferred as part of a transfer of a going concern. In contrast, the leasing transactions of the controlling company are internal supplies and are therefore not subject to VAT. The external supplies reflect the entrepreneurial activity of the controlling company and form the basis for assessing whether the purchaser is continuing the business. If the VAT group is dissolved and the controlled company, as the purchaser, continues the previous production activity on the property, this constitutes a transfer of a going concern, provided the property is part of the production business’s assets. This applies both if the former controlled company continues the business as an independent taxable person, and if it joins a new VAT group (Federal Fiscal Court, judgment of 26 June 2019 – XI R 3/17).
The sale of shares of a controlled company may also constitute a transfer of a going concern if the purchaser establishes a VAT group with the acquired company, enters into economic and organizational integration as the new controlling company, and continues the business activity. This applies even if not all of the shares are transferred, provided the conditions for a VAT group are objectively met and the new VAT group is established within a reasonable period.
What are the VAT consequences of a transfer of a going concern?
A transfer of a of a going concern is not subject to VAT – no VAT is charged (sec. 1 para. 1 a sentence 1 of the German VAT Act). There is no option to choose otherwise. Even an option for taxation under sec. 9 of the German VAT Act is excluded.
If a transfer of a going concern occurs, the purchaser must follow into certain VAT-related positions previously occupied by the seller (sec. 1 para. 1 a sentence 3 of the German VAT Act):
Input VAT adjustment (sec. 15 a of the German VAT Act): The adjustment period is not interrupted.
Change in the taxable amount (sec. 17 of the German VAT Act): The purchaser is obliged to make adjustments.
Continuation of existing options: For example, the option for taxation (sec. 9 of the German VAT Act), waiver of the small business regulation (sec. 19 para. 3 of the German VAT Act), or application of average taxation (sec. 24 of the German VAT Act).
Since assessing whether a business transfer qualifies as a transfer of a going concern is often complex, misjudgments are common. These can result in significant tax risks:
If a transfer of a going concern is assumed but the conditions are not met, the seller bears the risk. He must pay the VAT that was due and possibly interest.
Conversely, if the seller declares VAT, despite the transaction qualifying as a transfer of a going concern, he will owe the wrongly declared VAT under sec. 14c para. 1 sentence 1 of the German VAT Act (sec. 14c.1 para. 1 sentence 6 no. 4 of the German Administrative VAT Guidelines). In this case, the stricter correction rules of sec. 14c para. 2 sentences 3–5 of the German VAT Act apply (sec. 14c para. 1 sentence 3 of the German VAT Act). In this scenario, the purchaser bears the risk, as input VAT deduction is not permitted. The declared VAT is not legally owed, so the conditions of sec. 15 para. 1 sentence 1 no. 1 of the German VAT Act are not met. If the purchaser has already claimed input VAT, he must correct it, repay the amount to the tax office, and possibly pay interest.
Input VAT deduction of the seller
A transfer of a going concern does not constitute a change in circumstances within the meaning of sec. 15 a of the German VAT Act. Therefore, the seller’s input VAT deduction generally remains unaffected. This applies both to the original incoming supplies attributable to the business and to those related to the sale itself, such as notary fees, expert opinions, and brokerage costs. Since the transfer of a going concern is not a use-based transaction within the meaning of sec. 15 para. 2 of the German VAT Act, it does not lead to the exclusion of input VAT deduction (sec. 1.5 para. 7 sentence 1 of the German Administrative VAT Guidelines). What matters is the nature of the seller’s transactions prior to the sale. Typically, the costs of the sale are considered to be business overheads. They are directly and immediately related to the seller’s overall economic activity. If the seller performs both taxable and exempt transactions, input VAT deduction is only partially allowed.
Why are specific contractual provisions regarding a transfer of a going concern necessary?
A transfer of a going concern can be advantageous for both the seller and the purchaser, especially in terms of liquidity. However, the transaction must be correctly classified for VAT purposes. In practice, this classification is often difficult and fraught with uncertainty, which is why contractual safeguards are essential to mitigate potential risks for either party (see section 6). It is therefore advisable to include a clear VAT classification in the purchase agreement and to agree on a so-called tax clause. To ensure the conditions for a presumed transfer of a going concern are met and to support the tax classification, a contractual obligation for the purchaser to continue the business may be considered. Furthermore, the tax clause should not only document the parties’ shared understanding of the VAT treatment but also include provisions for the situation in the event that the tax authorities do not accept this classification. Possible solutions include indemnity clauses or adjustment clauses, in the case of subsequent tax assessments (e.g., payment of tax and possible interest). Such contractual arrangements provide legal certainty and protect both parties from financial burdens arising from retroactive tax claims and interest charges. Tax clauses are particularly important in property transfers to avoid a VAT-exempt sale in the event that the transfer of a going concern fails, which could negatively impact the seller’s right to deduct input VAT.
