Briefing Document & Podcast: C-444/10: TOGC – Business Transfers – Interpretation of “Totality of Assets”

Analysis of CJEU Case C-444/10, Finanzamt Lüdenscheid v Christel Schriever, concerning the interpretation of Article 5(8) of the Sixth VAT Directive.

Executive Summary

The European Court of Justice (CJEU) ruling in Finanzamt Lüdenscheid v Christel Schriever (Case C-444/10) provides crucial clarification on the interpretation of “transfer of a totality of assets or part thereof” under Article 5(8) of the Sixth VAT Directive (now largely superseded by Directive 2006/112/EC). This concept is an independent EU law concept designed to facilitate business transfers by allowing Member States to exempt them from VAT (the “no-supply rule”).

The case specifically addresses whether such a transfer can occur when a business’s stock and fittings are sold, but the business premises are only leased to the transferee, particularly if the lease is short-term terminable. The CJEU ruled that a lease arrangement, even if terminable at short notice, does not automatically preclude a transaction from qualifying as a transfer of a totality of assets, provided the transferred assets (including access to premises) are sufficient for the transferee to continue an independent economic activity on a lasting basis. This interpretation is strongly rooted in the purpose of Article 5(8) (to prevent disproportionate VAT burdens on transferees) and the principle of fiscal neutrality.

Legal Context and Purpose of Article 5(8) of the Sixth VAT Directive

VAT Applicability: Under Article 2(1) of the Sixth Directive, the supply of goods or services for consideration by a taxable person is subject to VAT. “Supply of goods” includes the “transfer of the right to dispose of tangible property as owner” (Article 5(1)).
Article 5(8) – The “No-Supply Rule”: This provision allows Member States to treat the “transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof” as if no supply of goods has taken place, meaning it is not subject to VAT. In such cases, “the recipient shall be treated as the successor to the transferor.” (Judgment, para 5).
Purpose of Article 5(8): The CJEU consistently interprets this article as aiming “to enable the Member States to facilitate transfers of undertakings or of parts of undertakings by making such transfers simpler and by preventing the resources of the recipient from being overburdened by a disproportionate charge to tax which, in any event, would ultimately be recovered through deduction of the input VAT paid” (Judgment, para 23; VAT and Business Transfers: Schriever Case Study, Answer Key, Q2).

The Finanzamt Lüdenscheid v Christel Schriever Dispute

Parties: Finanzamt Lüdenscheid (Lüdenscheid Tax Office) vs. Christel Schriever.
Background: Ms Schriever operated a retail sports equipment business. In 1996, she transferred the stock and fittings of her shop to Sport S. GmbH. Concurrently, she leased the business premises (which she owned) to Sport S. GmbH for an indefinite period, though the lease could be terminated at short notice (Judgment, paras 9-10).
Dispute:
- Ms Schriever’s Position: She treated the transaction as a non-taxable transfer of an entire business under German national law (Paragraph 1(1a) UStG), which transposes Article 5(8) of the Sixth Directive (Judgment, para 12).
- Finanzamt’s Position: The tax office categorised the transaction as subject to VAT, arguing that the “essential component element” of the business – the premises – was not sold, thus failing the conditions for a non-taxable business transfer (Judgment, para 13). They contended that “it is not possible to operate a retail business without shop premises” and a short-term terminable lease could not ensure business continuation (Judgment, para 15).
Referral to CJEU: The Bundesfinanzhof (Federal Finance Court of Germany) referred two questions to the CJEU, essentially asking if a “transfer of a totality of assets” occurs when stock and fittings are transferred alongside a lease of premises, and whether the short-term terminable nature of the lease is relevant (Judgment, para 18).

Key Interpretations by the CJEU

“Transfer of a Totality of Assets or Part Thereof” as an Independent EU Concept
- The Court reiterated that this concept “constitutes an independent concept of EU law which must be given a uniform interpretation throughout the European Union” (Judgment, para 22; VAT: Business Transfer and Leased Premises Clarity, Q4).
- It covers “the transfer of a business or of 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 which is capable of carrying on an independent economic activity” (Judgment, para 24).
- Crucially, it “does not cover the simple transfer of assets, such as the sale of a stock of goods” (Judgment, para 24). The transferred elements must “be sufficient to allow an independent economic activity to be carried on” (Judgment, para 25).
Role of Immovable Property and Lease Contracts
- Necessity of Immovable Property: The transfer of immovable property is not always necessary. Its requirement depends “on the nature of the economic activity at issue” (Judgment, para 26; VAT and Business Transfers: Schriever Case Study, Answer Key, Q6).
  - If an activity “does not require the use of particular premises or of premises equipped with fixtures necessary for the pursuit of the economic activity, there may be a transfer of a totality of assets… even without the transfer of property in an immovable asset” (Judgment, para 27).
  - However, if the “very nature of the economic activity entails the use of an inseparable bundle of movable and immovable property” (e.g., a retail shop), then “these immovable items must form part of the elements transferred” (Judgment, para 28; VAT and Business Transfers: Schriever Case Study, Answer Key, Q7).
- Lease Contracts: The Court explicitly states that a “transfer of assets may also take place if the business premises are made available to the transferee by means of a lease contract” (Judgment, para 29; VAT: Business Transfer and Leased Premises Clarity, Q6).
- This prevents “an arbitrary distinction between, on the one hand, transfers made by transferors who also own the premises… and, on the other, those made by transferors who hold those premises under a lease” (Judgment, para 30).
- Applying special treatment to transfers concomitant with a lease is “consistent with the purpose of Article 5(8)… also to accord special treatment to transfers of a totality of assets concomitant with the conclusion of a contract for lease of the business premises” (Judgment, para 31).
Transferee’s Intention and Continuation of Economic Activity
- For Article 5(8) to apply, the transferee must intend to operate the business and “not simply to liquidate the activity concerned immediately and sell the stock” (Judgment, para 37; VAT: Business Transfer and Leased Premises Clarity, Q7).
- This intention “can – or, in certain cases, must – be taken into account in the course of an overall assessment of the circumstances of a transaction, provided that they are supported by objective evidence” (Judgment, para 38).
- In the Schriever case, the continuation of the sports shop by Sport S. GmbH for “nearly two years confirms that its intention was not to liquidate the activity concerned immediately” (Judgment, para 39).
Significance of Lease Duration and Termination
- The duration and termination procedure of a lease are factors to be considered in the “overall assessment of the transaction” if they “might make it impossible to carry on the economic activity on a lasting basis” (Judgment, para 42).
- However, the possibility of terminating a lease contract of indefinite duration by giving short-term notice does not, of itself, decisively support the inference that the transferee intended immediately to liquidate the business (Judgment, para 43; VAT and Business Transfers: Schriever Case Study, Answer Key, Q10).
- Fiscal Neutrality Principle: Refusing to apply Article 5(8) solely on the grounds of lease terms (duration, termination) would violate the principle of fiscal neutrality, which “precludes… economic operators carrying out the same transactions from being treated differently in relation to the levying of that tax” (Judgment, para 44).

Conclusion of the Court

The CJEU ruled that:

“Article 5(8) of Sixth Council Directive 77/388/EEC… must be interpreted as meaning that there is a transfer of a totality of assets, or a part thereof, for the purposes of that provision, where the stock and fittings of a retail outlet are transferred concomitantly with the conclusion of a contract of lease, to the transferee, of the premises of that outlet for an indefinite period but terminable at short notice by either party, provided that the assets transferred are sufficient for the transferee to be able to carry on an independent economic activity on a lasting basis.” (Judgment, para 45, operative part).

This means that a business transfer involving a lease of premises, even a short-term terminable one, can still qualify for the VAT exemption, as long as the nature of the assets transferred and the access to the premises allow for the continued operation of the business. The focus is on the functional capacity to continue the economic activity, rather than specific ownership structures or lease terms.

Briefing Document & Podcast: C-444/10: TOGC – Business Transfers – Interpretation of “Totality of Assets”

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