Understand the VAT applicable to the transfer of an ongoing business (universality)

The transfer of a business and VAT

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The sale or transfer of a business is a complex transaction that raises a number of tax questions, especially in terms of VAT. The general principle is taxation, but an important exemption exists for transfers of a “universality of goods”. Understanding this mechanism is essential to secure the transaction for both the transferor and the purchaser.

Exemption from VAT when transmitting a universality of goods

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Article 257 bis of the French Tax Code (FTC) provides for an exemption from VAT for supplies of goods and services provided in connection with the transmission of a total or partial universality of goods. This system aims to not weigh on the cash flow of companies during restructuring or sale operations.

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What is a universality of goods?

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The concept of “total or partial universality of goods” is not limited to a simple sale of assets. According to administrative doctrine, which is based on European case law (ECJ, aff. C-497/01, Zita Modes SARL), it is a transfer of a business or a autonomous part of a business.

All the elements transmitted (physical, such as the material, and intangible, such as the customer) must constitute a viable economic exploitation, capable of continue an activity independently.

Thus, the simple sale of a stock of goods or the isolated transfer of a building, even if it was partially rented and subject to VAT, cannot benefit from this exemption because it does not constitute an autonomous branch of activity (Administrative Doctrine - BOI-TVA-CHAMP-10-10-40-10).

The intention of the purchaser is decisive: his objective must be to continue operating of the activity transmitted, and not to liquidate it immediately.

In particular, the following are considered universal transmissions:

• Mergers, divisions and partial transfers of assets (contribution of a complete branch of activity).
• The sale of a business, including if it is sold under lease-management.
• The transfer of an agricultural operation, even if the transferor maintains a subsistence plot or leases the buildings to the transferee.
• The universal transmission of assets (TUP) during a dissolution without liquidation.

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What are the conditions to benefit from the exemption?

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For the exemption to apply, two major conditions must be met:

1. The transferor and the beneficiary must be liable for VAT : The transfer must take place between two taxable persons acting as such for the operation in question.
2. The continuation of the person of the transferor : The beneficiary is deemed to continue the person of the transferor. If he is not a total taxable person (partially liable), he will have to adjust the VAT on capital goods if necessary, as the transferor would have done.

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What goods and services are concerned?

The exemption covers all the goods and services that make up the universality transmitted, whether they are:

• Merchandise stocks.
• Moveable investment assets (equipment, tools).
• Intangible assets (brands, patents, customers).
• Buildings and building land.

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The sale of an isolated component of the business

Unlike the transfer of a universality, the transfer of an intangible element singled goodwill (a brand, a patent, a list of customers) is a classic commercial transaction and therefore, in principle, subject to VAT.

However, tax is not required when this transfer is subject to the proportionate registration duties.

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The rental and management of a business

The rental of a business or its voluntary management is not a transfer of ownership but a mode of operation. As such, it is a supply of services subject to VAT (Administrative doctrine - BOI-TVA-CHAMP-10-10-40-10). Rents or fees received by the owner of the fund are therefore taxable.