The transfer of a business and VAT
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
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.
What is a universality of goods?
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.
What are the conditions to benefit from the exemption?
For the exemption to apply, two major conditions must be met:
- 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.
- 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.
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.
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.
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.
FTA guidelines referenced: BOI-TVA-CHAMP-10-10-50-10
