A lower German tax court has decided against the VAT relief in a case (Lower Tax court of Hessen 12.11.2014, 6 K 2574/11) where the buyer used part of the purchased real estate for its own business – while the seller had leased the whole property to third parties.

Reasons: The transfer of a leased property (i.e., property that generates income through the lease to a third party) can benefit from the VAT relief for the transfer of a business as a going concern (TOGC). As a principal rule, it is also sufficient for a TOGC if not the total but only a part of the property is leased to third parties (standard case law).

In the case at hand, however, the buyer “reduced” the former seller’s business by using a significant fraction (about 50 percent) of the formerly leased property for its own business. The lower tax court concluded that there was no “continuation” (i.e., operation) of the seller’s business. The lower tax court explained that in case of “leasing businesses,” the required evaluation of the overall circumstances of the case requires the buyer to essentially continue the whole business to benefit from the TOGC relief. The lower tax court claims to have inferred this allegation from a judgment of the German Federal Tax Court (BFH, 30.04.2009, Az. V R 4/07; in that case, the Federal Tax Court had deemed it sufficient for the TOGC relief (only) if the parts of the property, which the buyer did not lease to third parties, were still dedicated for generating leasing supplies as soon as possible). The lower tax court indicated (without evaluating this point in detail) that the VAT relief might be applicable if the buyer changed the use of, e.g., only a minor part of the property (opposed to the 50 percent in the case at issue).

Note: The line of reasoning in this case requires a comparison of the seller’s former with the buyer’s (intended) business. This idea appears to be somewhat misaligned to the new concept of the Federal Tax Court (19 December 2012, XI R 38/10) under which the seller does not even necessarily need to have conducted a separate business at all for the TOGC relief to apply. Apparently, the courts have difficulties to find a clear concept on the TOGC relief but rather keep on making exceptions or applying special rules with reference to the “evaluation of the overall circumstances of the case” depending on the nature of the particular business transferred in the individual case.