Flashback on ECJ cases C-497/01 (Zita Modes) – TOGC covers intention to operate the business or the part of the undertaking transferred and not simply to immediately liquidate the activity concerned and sell the stock

On November 27, 2003, the ECJ issued its decision in the case C-497/01 (Zita Modes).

Context: Sixth VAT Directive – Article 5(8) – Transfer of a totality of assets – Continuation by the transferee in the same branch of business as the transferor – Legal authorisation to pursue the activity.

Article in the EU VAT Directive

Article 5(8) of the Sixth VAT Directive (Article 19 of the EU VAT Directive 2006/112/EC).

Article 19 (Taxable transaction – Transfer of Going Concern)
In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and that the person to whom the goods are transferred is to be treated as the successor to the transferor.
Member States may, in cases where the recipient is not wholly liable to tax, take the measures necessary to prevent distortion of competition. They may also adopt any measures needed to prevent tax evasion or avoidance through the use of this Article.

Facts

According to the judgment of the court making the reference, on 29 August 1996 Zita Modes sent to Milady, which operated a perfumery, an invoice concerning the sale of a ready-to-wear clothing business for the sum of LUF 1 700 000. The invoice stated that, in accordance with the statutory provisions in force, it was not subject to the system of VAT.
By a tax statement notified on 25 June 1998, Diekirch Tax Office I (Luxembourg) of the Administration de l’enregistrement et des domaines automatically corrected the balance of VAT owed by Zita Modes for 1996, placing the following comment under the heading Observations: Adjustment of input tax deducted on B.I. taxation of the transfer of the business (Article 9(2) not applicable).
The Administration de l’enregistrement et des domaines maintained that Article 9(2) of the VAT Law was not applicable due to the absence of continuation of the transferor’s activity, the latter operating a clothing business and the transferee a perfumery.
In its complaint of 1 July 1998, Zita Modes argued that that provision did not state that continuation by the transferee of the transferor’s activity must be within the same branch. Moreover, since both parties involved were taxable persons, there would have been a full refund of the tax if the transfer had been subject to VAT.
On 25 August 1998, the Administration de l’enregistrement et des domaines rejected the complaint, stating in particular that Article 9(2) of the VAT Law required the transferee to be a taxable person who continued the transferor’s activity in the same branch. Moreover, the transferee must be legally entitled to operate in that branch, which was not the case here, as there was no specific authorisation for that purpose by the competent ministry.
Zita Modes made application to the Tribunal d’arrondissement de Luxembourg on 20 November 1998 for reversal of the Administration’s decision and for a ruling that the transfer of its business to Milady was not subject to VAT.
The national court points out that it is established that Zita Modes made a transfer of assets to Milady at the price of LUF 1 700 000. On the other hand, the assets which were transferred have not been exactly identified.
In particular, the national judgment states that Zita Modes’ claim that the transfer related to the fashion accessories matching the articles of ready-made clothing which formed part of the ready-to-wear clothing business sold, which comprises articles of perfumery produced by [the] same firm [as that which manufactured the articles of ready-made clothing] and which were used by Milady in continuation of the activity of … Zita Modes has not been established.
According to the national court, it must be decided in the main proceedings whether the transfer of a totality of assets to a taxable person, whatever his activity, constitutes a sufficient condition for the application of the rule laid down in Article 5(8) of the Sixth Directive, according to which, for the purposes of VAT, no supply of goods has taken place at the time of such a transfer (the no-supply rule), or whether the transfer must be made with the intention of continuing the transferor’s activity.
It also needs to be established whether the provision allows a distinction to be made between transfer of a totality of assets to a taxable person who pursues the transferor’s activity in accordance with the authorisation to pursue the activity laid down in the Member State concerned and transfer to a taxable person who does not hold the required authorisation.

Questions

1. Is Article 5(8) of the Sixth Directive … to be interpreted as meaning that the transfer of a totality of assets to a taxable person constitutes a sufficient condition for the transaction not to be made subject to value added tax, whatever the taxable person’s activity may be or whatever use he makes of the goods transferred?

2. If the answer to the first question is in the negative, is Article 5(8) of the Sixth Directive to be interpreted as meaning that the transfer of a totality of assets to a taxable person is to be understood as meaning a transfer of all or part of an undertaking to a taxable person who continues the whole activity of the transferor undertaking or continues the activity of the branch corresponding to the part of the totality of assets transferred, or merely as meaning a transfer of a totality of assets or part thereof to a taxable person who continues the transferor’s line of activity in whole or in part, without there being any transfer of an undertaking or branch of an undertaking?

3. If the answer to any part of the second question is in the affirmative, does Article 5(8) of the Sixth Directive require or allow a State to require that the transferee’s activity be pursued in accordance with the authorisation issued by the competent authority to pursue the activity or branch of activity stipulated, assuming that the activity pursued falls within lawful economic channels in the sense contemplated in the case-law of the Court of Justice?

AG Opinion

(1))Where a Member State has exercised the option in Article 5(8) of the Sixth VAT Directive, it must consider that no supply has taken place whenever there is a transfer of a totality of assets or part thereof within the meaning of that provision, subject only to any limitations contained in national measures designed to prevent distortion of competition in cases where the transferee is not wholly liable to tax.
(2))In order for there to be such a transfer, the assets transferred must form a sufficient whole to allow the pursuit of an economic activity and that activity must be pursued by the transferee. The transaction and its surrounding circumstances must be assessed globally in order to determine whether that is the case, having regard in particular to the nature of the assets transferred and the degree of continuity or similarity between the activities carried on before and after the transfer. In that context, it is not necessary for the transferee’s business to be the same as that of the transferor.
(3))It is not relevant for VAT purposes whether the transferee possesses administrative authorisation to carry on that business.

Decision

1. Article 5(8) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995 amending Directive 77/388/EEC and introducing new simplification measures with regard to value added tax – scope of certain exemptions and practical arrangements for implementing them, must be interpreted as meaning that when a Member State has made use of the option in the first sentence of that paragraph to consider that for the purposes of value added tax no supply of goods has taken place in the event of a transfer of a totality of assets, that no-supply rule applies – without prejudice to use of the possibility of restricting its application in the circumstances laid down in the second sentence of the same paragraph – to any transfer of a business or an independent part of an undertaking, including tangible elements and, as the case may be, intangible elements which, together, constitute an undertaking or a part of an undertaking capable of carrying on an independent economic activity. The transferee must however intend to operate the business or the part of the undertaking transferred and not simply to immediately liquidate the activity concerned and sell the stock, if any.

2. When a Member State has made use of the option in the first sentence of Article 5(8) of Sixth Directive 77/388, as amended by Directive 95/7, to consider that for the purposes of value added tax no supply of goods has taken place in the event of a transfer of a totality of assets, the restriction by a Member State of the application of that no-supply rule to transfers of a totality of assets where the transferee holds the authorisation for pursuit of the economic activity which that totality enables to be carried on infringes that provision .

Summary

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