In Germany, the transfer of a business as a going concern (Geschäftsveräußerung im Ganzen) is not subject to VAT under certain conditions, as specified in Section 1(1a) of the German VAT Act (Umsatzsteuergesetz, UStG). This provision is designed to facilitate business continuity without the additional burden of VAT. Here’s an in-depth look at the relevant legal framework, conditions, and implications for businesses.
Legal Framework
Section 1(1a) UStG: This section of the German VAT Act stipulates that the transfer of a business or an independent part of a business is not considered a taxable supply of goods or services. Instead, it is treated as a non-taxable event under specific conditions.
Key Points:
- The entire business or a self-contained part must be transferred.
- The transferee must continue the business operations.
- The transfer must include both assets and liabilities associated with the business.
Conditions for Non-Taxable Transfer
- Transfer of Entire Business or Independent Part
- The transaction must involve the transfer of the entire business or a sufficiently self-contained part of it that can operate independently.
- Example: A company sells one of its fully operational branches, including all assets, employees, and ongoing contracts.
- Continuation of Business Operations by the Transferee
- The transferee must intend and be capable of continuing the business operations without significant changes.
- Example: A buyer acquires a manufacturing plant and continues producing the same products using the existing infrastructure and workforce.
- Inclusion of Assets and Liabilities
- The transfer must include all essential assets and liabilities necessary to continue the business operations.
- Example: This includes property, machinery, inventory, customer contracts, and supplier agreements.
Practical Implications
Non-Taxable Event
- The transfer is not subject to VAT, meaning the seller does not charge VAT on the transaction, and the buyer cannot deduct input VAT.
- This simplifies the transaction and improves cash flow for the buyer, as they do not have to finance the VAT upfront.
Documentation and Record-Keeping
- Proper documentation is crucial to substantiate that the transfer meets the criteria for non-taxable treatment.
- Both parties should retain detailed records, including contracts, asset lists, and statements of intent to continue business operations.
Notification to Tax Authorities
- Although the transfer is not subject to VAT, it is advisable to notify the tax authorities and provide them with relevant documentation to avoid potential disputes.
- An advance ruling from the tax authorities can provide certainty and avoid future complications.
Practical Example
Scenario:
- Company A sells its entire retail division to Company B.
- The retail division includes several stores, inventory, staff, and customer contracts.
- Company B intends to continue operating the stores without significant changes.
VAT Treatment:
- The transfer qualifies as a non-taxable event under § 1 Abs. 1a UStG.
- No VAT is charged on the sale, and Company B does not deduct input VAT.
Role of WW+KN and Baker Tilly
WW+KN, a Baker Tilly Company, offers comprehensive support for businesses undergoing transfers of operations. Our services include:
- Consultation: Providing expert advice on the VAT implications of business transfers.
- Documentation Review: Ensuring that all necessary documentation is complete and compliant.
- Legal Representation: Baker Tilly Legal offers specialized legal support in tax law to protect your business interests during the transfer.
WW+KN acts as a single point of contact, integrating tax and legal expertise for comprehensive service. For professional assistance, contact us at info@vat-germany.com. We help you navigate the complexities of VAT compliance, ensuring your business transfers in Germany are conducted efficiently and in full compliance with the law.