Contributing Real Estate to a Family Foundation May Be Exempt from VAT as a Business Transfer
Individual Interpretation by the Director of the National Tax Information Agency dated April 26, 2024, Ref. No. 0112-KDIL3.4012.174.2024.1.AK
A VAT taxpayer operating a sole proprietorship in the rental and leasing of real estate (both buildings and premises) applied for an interpretation. The factual state indicated that the majority of the taxpayer’s activities were subject to VAT, with a limited scope of VAT exemption for properties rented for residential purposes.
The taxpayer intended to contribute the entire assets related to their business operations to a family foundation through a donation. This transfer would include property ownership rights, lease and rental agreements, property management contracts (entered into by the taxpayer for part of the properties), as well as other contracts related to the said business (including insurance, utility supply, and cleaning services). The contract for accounting services was excluded from the transfer. The family foundation would continue the business of leasing and renting properties.
The taxpayer requested confirmation that the planned transaction should be considered a business transfer exempt from VAT, which the tax authority confirmed as correct.
Relying on the case law of the CJEU (Case C-497/01, Zita Modes and Case C-444/10, Christel Schriever), the Director of the National Tax Information Agency noted that the transfer of an entire business or part thereof is VAT-neutral if the transferred assets allow for independent business activities, and the acquirer intends to continue operating the business.
The Director emphasized that, in this case, the family foundation would continue the business of leasing or renting properties in an unchanged form. Furthermore, the continuation of the existing business would be possible without acquiring additional items or assets. The authority considered that excluding such (non-essential) components as the accounting service agreement from the transaction does not preclude recognizing the transaction as a business transfer exempt from VAT under Article 6(1) of the VAT Act.
This interpretation confirms that under certain conditions, the transfer of real estate with active lease/rental agreements may be recognized as a transaction not subject to VAT. Consequently, the VAT settlement of such an operation is significantly simplified, removing a potential deterrent for transferring such assets to family foundations.
Nevertheless, when undertaking similar actions, taxpayers should carefully analyze the circumstances of their case, as certain elements of the factual situation may affect the final VAT consequences of contributing assets to a family foundation. Given this risk, taxpayers should consider applying for an individual interpretation in such matters.