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I. Introduction to Article 5(8) of the Sixth VAT Directive
Article 5(8) of the Sixth Council Directive 77/388/EEC, as amended by Directive 95/7/EC, is a crucial provision within the European Union’s Value Added Tax (VAT) framework. Its primary purpose is to “facilitate transfers of undertakings or parts of undertakings by simplifying them and preventing overburdening the resources of the transferee with a disproportionate charge to tax which would in any event ultimately be recovered by deduction of the input VAT paid” (CURIA, para. 39). This mechanism, often referred to as the “no-supply rule,” allows Member States to treat the transfer of a totality of assets as if “no supply of goods has taken place” for VAT purposes (CURIA, para. 5; VAT Transfers and the “No-Supply Rule,” Q1).
This briefing document reviews the main themes and important ideas derived from the provided sources, particularly focusing on the interpretation and application of Article 5(8) as clarified by the European Court of Justice (ECJ) in the Zita Modes Sàrl case.
II. Core Principles and Interpretation of Article 5(8)
A. Principle of Fiscal Neutrality
A fundamental principle underlying the common VAT system and guiding the interpretation of VAT provisions, including Article 5(8), is fiscal neutrality (CURIA, para. 38; VAT Transfers and the “No-Supply Rule,” Q8). This principle ensures that the “deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities,” promoting consistent taxation regardless of the activity’s purpose or results, provided it is subject to VAT (CURIA, para. 38). The “no-supply rule” supports this by avoiding a significant upfront VAT charge during business transfers that would ultimately be offset by input VAT deductions, thus preventing an undue burden on the transferee’s financial resources (VAT Transfers and the “No-Supply Rule,” Q1).
B. “Totality of Assets or Part thereof” – A Uniform Community Concept
The concept of “a transfer… of a totality of assets or part thereof” is an independent concept of Community law, requiring an “autonomous and uniform interpretation throughout the Community” (CURIA, para. 34). The ECJ has clarified that this concept:
- “covers the 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” (CURIA, para. 40; VAT Transfers and the “No-Supply Rule,” Q4).
- Explicitly excludes “the simple transfer of assets, such as the sale of a stock of products” (CURIA, para. 40; VAT Transfers and the “No-Supply Rule,” Q4). The rule is not applicable to mere stock transfers because they do not represent a coherent body of assets capable of independent economic activity (VAT Transfers and the No-Supply Rule Study Guide, Q10).
C. Transferee’s Intent and Continuation of Activity
For the “no-supply rule” to apply, the transferee must intend to operate the business or the part of the undertaking transferred (CURIA, para. 44; VAT Transfers and the “No-Supply Rule,” Q2). This means the transfer should not be merely for the purpose of immediately liquidating the activity and selling off the stock (CURIA, para. 44).
However, a crucial clarification from the Zita Modes case is that the Sixth VAT Directive does not require the transferee to pursue the exact same type of economic activity as the transferor (CURIA, para. 45; VAT Transfers and the “No-Supply Rule,” Q3). The emphasis is on the transferred assets forming a functional whole capable of independent economic activity, which the transferee intends to utilize for their own taxable transactions (VAT Transfers and the “No-Supply Rule,” Q3).
D. “Successor” Status as a Consequence, Not a Condition
Article 5(8) states that “the recipient shall be treated as the successor to the transferor” (CURIA, para. 5). The ECJ clarified that this “succession does not constitute a condition for the application of the paragraph, but is merely a result of the fact that no supply is considered to have taken place” (CURIA, para. 43; VAT Transfers and the “No-Supply Rule,” Q6). This implies that if the “no-supply rule” applies, the transferee automatically assumes the transferor’s VAT rights and obligations, such as adjustments for capital goods deductions (VAT Transfers and the “No-Supply Rule,” Q6).
III. Limitations on Member States’ Discretion in Applying the “No-Supply Rule”
The Zita Modes Sàrl case, which involved a dispute over the VAT treatment of a clothing business sale to a perfumery in Luxembourg, provided significant clarification on the extent to which Member States can restrict the application of Article 5(8) (CURIA, paras. 9-14; VAT Transfers and the No-Supply Rule Study Guide, Q9).
A. Exhaustive Nature of Permitted Restrictions
If a Member State opts to implement Article 5(8), it “must apply the no-supply rule to any transfer of a totality of assets or part thereof and may not therefore restrict the application of the rule to certain transfers only, save under the conditions laid down in the second sentence of the same paragraph” (CURIA, para. 31; VAT Transfers and the “No-Supply Rule,” Q5).
The only explicit exception allowed by the directive is for Member States to restrict the rule’s application “in cases where the recipient is not wholly liable to tax” (CURIA, para. 5). This is to “prevent distortion of competition” (CURIA, para. 5) where a partially taxable person would otherwise gain an unfair advantage (CURIA, para. 25; VAT Transfers and the “No-Supply Rule,” Q5). This provision is considered exhaustive, meaning Member States cannot impose other conditions or limitations (CURIA, para. 30).
B. Irrelevance of Legal Authorization for Transferee’s Activity
A key finding in Zita Modes was that a Member State cannot restrict the application of the “no-supply rule” based on whether the transferee holds the necessary legal authorization to pursue the economic activity (CURIA, para. 55; VAT Transfers and the “No-Supply Rule,” Q7). The Court stated that “a Member State may not restrict the scope of the no-supply rule laid down in Article 5(8) of the Sixth Directive to transactions carried out by traders who are authorised by national law to pursue the activity in question” (CURIA, para. 50).
This aligns with the principle of fiscal neutrality, as “transactions which, although unlawful, do not relate to products whose marketing is prohibited by their very nature or because of their special characteristics and which may compete with lawful transactions are subject to the taxes normally payable under the Community rules” (CURIA, para. 51). The fact that an economic activity is subject to special business authorization in a Member State is “immaterial” (CURIA, para. 52) because an unauthorized trader can still be in competition with authorized ones (CURIA, para. 53).
IV. Divergence between Luxembourg National Law and EU Law (Zita Modes Case)
The Zita Modes Sàrl case highlighted a divergence between Luxembourg’s national VAT Law (Article 9(2)) and the interpretation of Article 5(8) of the Sixth Directive by the ECJ.
Luxembourg’s Administration de l’enregistrement et des domaines argued that Article 9(2) of the VAT Law required the transferee to:
- Continue the transferor’s activity in the same branch (CURIA, para. 13).
- Be legally entitled to operate in that branch (i.e., hold specific authorization) (CURIA, para. 13).
The ECJ, in its ruling, directly countered these interpretations:
- It affirmed that continuation in the exact same branch is not required, only the intent to operate the business (CURIA, para. 45).
- It explicitly ruled that a Member State cannot impose a requirement for the transferee to hold legal authorization for the activity (CURIA, para. 55).
Thus, the ECJ’s ruling effectively broadened the scope of the “no-supply rule” as applied in Member States, ensuring uniform application and upholding fiscal neutrality over national administrative requirements that go beyond the explicit provisions of the Directive.
V. Conclusion
Article 5(8) of the Sixth VAT Directive is a pivotal provision designed to streamline business transfers by allowing Member States to implement a “no-supply rule,” thereby preventing disproportionate VAT burdens. The Zita Modes Sàrl judgment significantly clarified its interpretation, emphasizing the principle of fiscal neutrality, defining “totality of assets” as a functional business unit, and limiting the conditions Member States can impose for its application. Specifically, it established that the transferee is not required to continue the exact same type of business activity nor to hold specific legal authorization for that activity, reinforcing the uniform application of EU VAT law across Member States.
See also:
- Join the Linkedin Group on ECJ/CJEU/General Court VAT Cases, click HERE
- VATupdate.com – Your FREE source of information on ECJ VAT Cases
