The sale of businesses and VAT implications

01.2015

The sale of businesses, whether wholly or partially, is commonplace — either due to the owner’s retirement plans or to divest a struggling enterprise. Depending on the structuring of the transaction, VAT may or may not apply. Where a substantial portion of a business’s assets — constituting an identifiable business unit — is sold and integrated into the acquiring entity (even in a different sector), the transaction is generally exempt from VAT. Similarly, staged sales, where a few assets are initially sold and the remainder at a later stage (subject to certain conditions, sometimes requiring several months), are permissible. Such operations may require careful reclassification depending on compliance with the conditions, necessitating a thorough justification to the tax authorities to avoid substantial penalties.

The CJEU’s judgment in Zita Modes (C-497/01) sought to harmonise the disparate interpretations of EU VAT rules by Member States. However, uniformity has not yet been fully achieved, and considerable risks remain. Therefore, prior to contract execution, a detailed tax assessment is essential. Contracts should also address business succession issues, which further complicates the operation.

++ Published at the tax newsletter of the German Chamber of Commerce in Spain related to VAT news ++