Supply of commercial real estate vs. enterprise/organized part of enterprise
The disposal of commercial real estate, together with additional assets used to carry out a specific business activity, may have diametrically different VAT consequences depending on the classification of the subject of the transaction as either goods or a business/organization thereof. Indeed, the transaction of disposal of an enterprise/organization is not subject to VAT.
On the other hand, the supply of real estate is generally subject to VAT, and therefore the appropriate VAT rate for such a transaction must be determined, or a VAT exemption may apply.
While the law defines both a business and an organized part of a business, one should also keep in mind the rather rich jurisprudence of the CJEU regarding under what circumstances a transfer of all or part of a taxpayer’s assets can be considered not subject to VAT (e.g., judgment of November 27, 2003 in Case C-497/01, Zita Modes, judgment of November 10, 2011 in Case C-444/10 Christel Schriever, order of January 16, 2023 in Case C-729/21).
In light of this jurisprudence, it is also necessary to take into account the intention of the buyer to permanently continue the business previously conducted by the seller with the help of the assets disposed of, as well as whether such assets are sufficient to enable the buyer to conduct independent business activities.
The CJEU case law is also referred to by the Minister of Finance in the Explanatory Notes dated December 11, 2018. “Taxation of goods and services tax on the disposal of commercial real estate transactions”. According to the above-mentioned Explanatory Notes, in assessing whether the assets should be considered a business or CSC, the buyer’s intention to continue the business previously conducted by the seller with the help of the assets that are the subject of the transaction and the actual possibility of continuing this business based on these assets should be taken into account.
In light of the Explanations, in order to recognize the subject matter of the transaction as an enterprise/ZCP, it is important to determine whether, in addition to the transfer of standard elements typical of real estate transactions subject to VAT (such as, among others, land, building, structures, technical infrastructure and appurtenances, rights and obligations under lease agreements), additional elements, such as a real estate management contract or receivables of a monetary nature related to the transferred assets, will also be transferred to the buyer.
The value of the Explanations lies, on the one hand, in presenting the Finance Minister’s position on the criteria to be applied to distinguish a transaction involving the supply of real estate from the sale of a business/CCP, and, on the other hand, in their protective power enjoyed by taxpayers who comply with their content.
Nevertheless, it should be noted that the Explanations are quite general in nature and the variety of facts occurring in practice may cause difficulties in directly relating them to the situation of a given taxpayer.
Given the above, as well as the significant consequences of misclassification of assets (e.g., questioning the right to deduct on the acquisition of assets on which, in the opinion of the tax authorities, VAT was incorrectly charged), it should be good practice to carry out a thorough analysis of such cases and, if necessary, apply for an individual interpretation (for which the parties to the transaction may apply together through a joint application).