In this regard, the Italian Tax Authorities (ITA) and the tax court have intervened several times with contrasting interpretations, creating issues for taxpayers that, on several occasions, need to explore beforehand the tax characterization of given transactions (i.e., asset deal versus transfer of a going concern, (TOGC)). Indeed, while the sale of assets is subject to VAT (generally deductible by the purchaser), the TOGC is subject to Italian transfer tax. It is crucial under Italian law to determine whether the ensemble of assets transferred qualifies as a business unit. 

Considering a fragmented interpretative context in Italy, it would seem essential to refer to EU principles to correctly address each case from a VAT perspective.

From a Belgian VAT perspective, it's important to carefully analyze each transaction and, if needed, confirm the applicable VAT treatment with a ruling.

From a Dutch and UK context, unlike the Italian perspective, the application of the TOGC VAT exemption depends also on whether the nature of the transferred economic activity continues to be the same.

EU legislative framework

Article 19 of Directive No. 2006/112/EC ("VAT Directive") states:

In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and that the person to whom the goods are transferred is to be treated as the successor to the transferor. Member States may, in cases where the recipient is not wholly liable to tax, take the measures necessary to prevent distortion of competition. They may also adopt any measures needed to prevent tax evasion or avoidance through the use of this Article.

It seems clear that the EU rule leaves to the member states the possibility to derogate from the qualification of supply of goods by virtue of the intrinsic nature of some or all of the assets that may constitute a business.

The option given to the member states whether to classify a transfer of a going concern as a supply of goods has the objective of not burdening the financial resources of businesses where, in fact, the application of VAT on the transfer of a business could lead to situations of financial instability for the businesses involved in the transaction.

As is well known, the VAT Directive does not include any definition of a transfer, of a totality of assets or part thereof, and makes no explicit reference to the law of the member states for determining its meaning and scope, so that it must be given an autonomous and uniform interpretation throughout the EU.¹ In this regard, the Court of Justice of the European Union (CJEU) clarified that this concept includes any transfer of a business or an independent part of an undertaking, including tangible elements and intangible elements that, together, constitute an undertaking or a part of an undertaking capable of carrying on an independent economic activity.²

As to the use by the transferee of the totality of assets transferred, the VAT Directive does not set forth any specific condition, except that the no-supply rule applies if the recipient is the successor to the transferor. This principle has been recently confirmed by the order issued by the CJEU in Case C-729/21, according to which, Article 19 of the VAT Directive must be interpreted as meaning that:

… it does not preclude a provision of national law which provides that the "transfer of a total or partial universality of assets" is not subject to value added tax, without making its application conditional on the recipient being the legal successor of the transferor.

Indeed, the succession does not constitute a condition for the application of the rule but is merely a result of the fact that no supply is considered to have taken place.

On the other hand, the recipient is not explicitly required to carry out the same business activity carried out by the transferor. The CJEU clarified that the transferee must, however, intend to operate the business or the part of the undertaking transferred and not simply to immediately liquidate the activity concerned and sell the stock, if any.³

Italian legislative framework

In Italy, European legislation has been implemented by Article 2, paragraph 2, letter b) of Presidential Decree No. 633/1972 ("Italian VAT Law"), which places the transfers of a business and a going concern outside the VAT scope. This article provides that "contributions and transfers to companies or other entities … of business or going concern … shall not be considered supplies of goods".

The reasons behind the Italian legislator's decision to treat the transfer of a going concern as outside the VAT scope are manifold: from the difficulty of determining the taxable amount, to the futility of taxing an asset that, by its nature, is not supplied to a final consumer.

As may be observed, unlike the European provisions, Italian VAT Law does not refer to the principle of continuation by the transferee of the transferred activity.

From a domestic perspective, on the notion of business/totality of assets, the ITA (in line with the CJEU's case law) clarified that it must be given a broad interpretation, including transfers of lines of business/entrepreneurial units as well. In any case, the transfer must cover the going concern as a whole, intended as universitas of tangible and intangible goods, as well as the legal/economic relationships capable of allowing the performance of a business activity, and not just single assets constituting the same business.⁴

A business as a going concern is characterized by the organization of goods destined to the performance of a business activity. In this sense, organization is intended as the ability of the entrepreneur to create and organize a functional and instrumental relationship between the assets destined to the business activity, with production/commercial capacity.⁵

Unlike the wording of the VAT Directive, Italian VAT Law — as seen above — does not include any specific reference to the continuation by the recipient of the going concern transferred as a requirement of the going concern to be qualified as such. In this connection, the Supreme Court's case law would not seem to really capture this aspect. According to the Supreme Court, the transfer of a going concern from a civil law perspective, as well as for tax purposes, must be assessed based on objective parameters; to this end, the intention to break up the going concern acquired or to allocate it to a different production activity is not relevant, as the very nature of the transfer of an organized totality of assets is not altered by such intention.⁶ The Supreme Court also stated that a transfer of a business occurs when the actual object of such transaction is the transfer of goods intended as a functional totality, capable of expressing in a forward-looking perspective their aptitude to the performance of a business activity.⁷ Basically, according to the Supreme Court, the mere potential aptitude/suitability of the goods to be used for the performance of a business activity is sufficient for identifying a going concern; on the other hand, actual performance of a business activity seems to have no relevance. Similarly, according to the Supreme Court, no relevance should be given to the lack of transfer of financial, commercial and personal relationships.⁸

The view of the Supreme Court, however, is not entirely endorsed by the ITA. The ITA's guidance would seem to be more in line with the wording of the VAT Directive and the view of the CJEU. According to the ITA, transfer of a going concern is an extraordinary transaction that generally entails continuity within the transferor and the transferee.⁹

In this regard, the ITA ruled out the application of the no-supply rule to a transfer of a customer list, as this would not have autonomous production capacity.¹⁰ Similarly, the transfer of a member list does not amount to a totality of assets capable per se of allowing the autonomous continuation of sales activities (through a digital platform).¹¹

On the other hand, the ITA recognized the transfer of a business as a going concern in a totality of trademarks, formulas, design, domain name and related intangible rights, as well as inventories. According to the ITA, these elements, when combined, represent an organization capable of performing a business activity ex se, as a whole. The relevant transfer, therefore, falls within the scope of application of the no-supply rule.¹²

Based on the same reasoning as above, the ITA decided on the application of the no-supply rule in connection with the transfer of significant assets for the business, i.e., a pharmaceutical product's trademark, the relevant marketing authorization, the product dossier and remaining inventory.¹³ On the other hand, the transfer of assets such as notes, loans, derivative instruments and relevant edging contracts, as well as participation in a governmental entity, not including employment agreements/agreements with contractors, consultancy agreements and the like, and any tangible or intangible assets, does not amount to a transfer of a business benefitting from the no-supply rule.¹⁴

Along the lines discussed above, the notion of going concern relevant from a VAT perspective was the subject matter of three very recent rulings by the ITA. Notably, in all these rulings, the ITA concluded that there was no "going concern," thereby excluding the application of the no-supply rule set out in Article 19 of the VAT Directive:

1. In ruling No. 315 dated 8 May 2023, the ITA ruled on a securitization transaction, whereby a company (Alfa) transferred to an SPV (Beta SPV) several cars that were previously leased to another company (Gamma), which used them for its car rental business. The transfer was aimed at segregating the vehicles, so that the proceeds deriving from the rental of these vehicles were destined to the payment of noteholders. However, the transaction did not entail the transfer of the leasing agreements in place between Alfa and Gamma, as Beta SPV and Gamma negotiated new leasing agreements. Furthermore, pursuant to a servicing agreement, Alfa was granted a mandate from Beta SPV to organize and managed the transferred vehicles in the interest of the bondholders.

The ITA, recalling its previous guidance and domestic case law, noted that the essential element of a going concern is the organization of the transferred assets, which demonstrates their aptitude to carry out a business, even where such assets need to be integrated in the transferee's entrepreneurial organization. Considering this background, the ITA concluded that the securitization transaction did not entail a transfer of a going concern. This is because, at the time of the transfer of the cars from Alfa to Beta, such cars should not be considered organized to carry out a business. The ITA attached relevance to the circumstance that the leasing agreements between Alfa and Gamma were not transferred to Beta SPV together with the cars, while Beta SPV and Gamma engaged in negotiations to conclude new leasing agreements. In addition, the ITA pointed out that the specific features of Beta SPV (i.e., its nature of SPV, its role within the securitization transaction and its limited corporate purpose) confirmed the lack of the organization requirement.

2. Ruling No. 399 dated 27 July 2023, deals with a company (Alfa) engaged in the automotive industry that was facing a financial distress situation. Alfa entered into an agreement with a company belonging to another group (Beta), a key client of Alfa for the supply of electric components, with interest in ensuring Alfa's ability to perform the supplies of these components. Under this agreement, Alfa transferred to Beta's certain affiliates (a) certain goods (defined as Inventories in the ruling) that were destined to be scrapped, being directly delivered to a disposal site, and (b) certain patents and other intangible rights generated by Alfa in connection with projects carried out to the benefit of Beta (defined as Work Results in the ruling). Under this arrangement, Beta granted to Alfa a support payment aimed at preserving Alfa's business continuity.

According to the ITA, these transactions should not constitute, in the aggregate, a transfer of business concern, but should be qualified as separate VATable transactions. According to the ITA, the purpose of the overall contractual arrangement was not to transfer a going concern, but rather to preserve Alfa's business continuity and supply flows. In particular: (a) the Inventories were not capable of being used in Beta's business cycle, being destined to be scrapped according to the intention of the parties; and (b) the transfer of the Work Results was aimed at transferring the patents and other intangible assets resulting from the projects that Beta entrusted to Alfa. Accordingly, these assets should not be considered as allowing Beta to carry out a business activity.

3. Finally, ruling No. 404 dated 28 July 2023, dealt with the transfer of a property complex used for touristic purposes. Such property complex included roads, dwellings, green areas, play areas, sport fields, infrastructure and service buildings (e.g., reception, buildings destined for business activities such as minimarket, restaurant, etc.). Such a property complex was owned by Alfa, which leased it to Beta, a property management company. Alfa was willing to sell the property complex to Epsilon, which would be assigned the leasing agreement with Beta. The transfer would cover no employees, equipment, licenses or administrative permits.

The ITA concluded that no going concern was transferred, based on the following reasons:

1. First, the ITA quoted some recent decisions of the Italian Supreme Court on whether a lease agreement of a real property should be qualified as a lease of a going concern or as a "simple" lease of a real estate.¹⁵ According to such case law, the key element to distinguish between leasing of a going concern and leasing of a real estate is the importance and relevance of the real estate, compared to the other goods and services in scope of the leasing.
2. Furthermore, the ITA noted that the various immovable assets constituting the property complex were not characterized by the organization, that is the key feature of a going concern. In this respect, the ITA pointed out that the transfer covered neither employees nor financial/commercial relationships, and that the transferee did not have any employees and managed all aspects of its activities through third-party providers.

Belgian legislative framework

In Belgium, European legislation has been implemented through Articles 11 and 18(3) of the Law of 3 July 1969 implementing the VAT Code ("Belgian VAT Law"). These articles provide that a transfer, "whether for consideration or for free, in the form of […] a whole of assets or a branch of activity" is not a supply of goods or services for VAT when "the transferee is a taxable person who could deduct all or part of the tax if it were due as a result of the transfer".

Essentially, under the TOGC rules, the sale of (part of) a business will not be subject to VAT, if the following main criteria are met:

1. Acquisition of (part of a) business: The contributed assets and liabilities must include the transfer of an entire business or of an autonomous part of a business with tangible and possibly also intangible assets, which, together, constitute an enterprise that can operate an autonomous economic activity. This condition needs to be fulfilled in the hands of the transferee.
2. Continuation of the business: The transferee must have the intention to continue exploiting the activity of the transferor and not simply to liquidate the activity immediately.
3. Transferee: The transferee must be a VATable person that could partially or fully deduct the VAT on the transaction if it were due. If the transferee is a partial VATable person, this condition should be met but it will trigger potentially VAT recapture costs on the acquired business.

Even if the terms used in the European legislation and the Belgian VAT Law differ somewhat, the concepts of universality of assets and branch of activity are autonomous concepts of EU law and should, therefore, be interpreted in the same way. In this context, Belgium provides rulings and guidance to interpret and apply TOGC rules, influenced by the CJEU's case law. In particular, we note the following:

1. The transferee's intention to continue exploiting the activity of the transferor is an essential condition for the application of the TOGC rule (see above). However, it is not required that the economic activity that the transferee will pursue is the exact same activity that was pursued by the transferor (Administrative Guidance AOIF 46/2009; see also case C- 497/01, Zita Modes Sarl, §45).
2. The transfer of all the assets or the branch of activity can be spread over time or by means of separate contracts (such as a contribution followed by a sale). It is required in that case that the various transactions are linked together as being part of the transfer (Administrative Guidance AOIF 46/2009).
3. In some cases, disputes have arisen regarding whether a transfer involves only part of the business, thus impacting the application of TOGC rules. For example, the transfer of a finance lease activity can fall under the TOGC rules as being the transfer of a branch of activity (ruling 2018.1048 of 29 July 2019). Similarly, the tax authorities have accepted that the transfer of immovable goods and the corresponding finance lease could constitute a transfer of a branch of activity (ruling 2020.1540 of 26 October 2020). We also refer here to the recent case law of the CJEU (C-729/21, 16 January 2023) relating to the transfer of leased property (shopping center) that fell under the TOGC rules. 

The above highlights the need for careful consideration of each transaction's unique circumstances. Therefore, it is important to carefully analyze each transaction and, if need be, confirm the applicable VAT treatment with a ruling.

Dutch TOGC framework

In the Netherlands, a TOGC is exempted from VAT by Article 37d of the Dutch VAT Act and no specific transfer tax is due on such transfers (although a real estate transfer tax does exist). Aside from the following EU prerequisites, Dutch VAT law imposes no additional requirements for application of the TOGC VAT exemption:

1. To transfer (part of) a totality of assets that forms a sufficient whole to allow the pursuit of an economic activity.
2. That the person to whom the goods are transferred is to be treated as the successor to the transferor and have the intention to continue to operate the business or the part of the undertaking transferred.

In Dutch case law, the Dutch Supreme Court did provide some further detail on what is considered a transfer of (part of) a totality of assets that forms a sufficient whole to allow the pursuit of economic activity and when that can be considered continued by the transferee in the Dutch context. We will provide some further insights into two judgments.

In 2018, the Dutch Supreme Court held that for a transfer of machines that were being leased out, there was no continuation of (part of) a totality of assets even though the machines continued to be leased to the same lessees.¹⁶ The Dutch Supreme Court considered this to be the case, because the nature of the economic activity changed, in spite of the continued lease. The reason was that the new lessor concluded new contracts with the lessees, with these contracts on several points diverging from the previous contracts and changing the (previous) legal position between the lessor and the lessees.

Along the same lines, in 2021, the Dutch Supreme Court held that a sale and leaseback transaction concerning an apartment block did not qualify as a TOGC.¹⁷ In this case, a foundation (the seller) developed an apartment block, leased the premises to its tenants and subsequently sold it to a Dutch BV (the buyer) under the conditions that it leased back the apartment block to the seller, and that the seller could continue the sublease of the premises to the tenants and would conduct management services to the buyer (for the maintenance of the block). Although the transferred apartment block was leased back (hence a transfer of an economic activity) to the seller that initially owned the real estate, the Dutch Supreme Court considered that the buyer did not continue to operate the business (or part thereof) transferred by the seller. Instead, the Dutch Supreme Court argued that as the seller was now a tenant of the buyer and conducted management services vis-à-vis the buyer, it cannot be held that the seller transferred its (or part thereof) economic activity (i.e., the lease of the premises in the apartment block) to the buyer. Consequently, the TOGC VAT exemption could not be applied according to the Dutch Supreme Court.

In our view, a key takeaway for the application of the TOGC VAT exemption in the Dutch context is, therefore, whether, despite a totality of assets that forms a sufficient whole to allow the pursuit of an economic activity being transferred, the nature of the transferred economic activity continues to be the same.

UK perspective

The UK has implemented Article 19 of the VAT Directive by virtue of Article 5 of the Value Added Tax (Special Provisions) Order 1995/126 (SPO), which, unlike the Italian VAT Law, specifically requires that "the assets are to be used by the transferee in carrying on the same kind of business".¹⁸

Therefore, for a sale of assets to qualify as a TOGC in the UK, the following conditions must be met:

1. The transferee must actually use the transferring assets to carry on a business.
2. Furthermore, this business must be of the same kind that the transfer or used the assets for.

As such, UK VAT law differs from Italian VAT Law and the VAT Directive, in respect of the requirements for a transfer of assets to be deemed as a TOGC, as the mere ability or suitability of the transferring assets to be used to carry on a business post-transfer is not sufficient; instead, the economic reality must be that the transferring assets actually are used to carry on the same kind of business.

Therefore, in addition to assets transferring, the continuance of the same kind of business is "the necessary second element" within the UK TOGC provisions, which is a test that should consider the transfer of the undertaking holistically (i.e., a substance over form approach) and the intention of both parties.¹⁹

The UK added this additional requirement to prevent distortion of competition and/or tax evasion/avoidance, as permitted under Article 19 of the VAT Directive, available to all member states when exercising the option to implement the TOGC no-supply rule. The UK courts deem this additional requirement to the compatible with EU law.²⁰

When determining whether the "same kind of business" is being undertaken by the transferee using the transferring assets, the UK courts state that there must be "an overall assessment of the factual circumstances, which includes the intentions of the transferee".²¹

In Intelligent Managed Services²² (IMS), the upper tribunal in the UK found that, following a substance over form approach when analyzing the "same kind of business" test,²³ whereby the transfer of a business to a company that was part of a group, and that, post-transfer, was to make supplies internally to the group, could qualify as a TOGC.

IMS transferred its banking support services division to Virgin Money (VM), which in turn was part of the wider Virgin Money Group (VMG) VAT group. As VM's provision of banking support services was intra-VAT group (and, therefore, disregarded for VAT purposes), to be incorporated into the wider VMG VAT group's provision of retail banking services, the question was whether this could be deemed to be "the same kind of business." The upper tribunal found that, considering all the circumstances as to whether it was a transfer of assets or an undertaking, including the intention of the parties, the assets were being used for the same economic activity post-transfer and the VAT grouping rules could not prevent the TOGC provisions applying.

In summary, UK law provides for an additional TOGC requirement whereby the transferring assets must be used to operate the "same kind of business" post-transfer. What constitutes the "same kind of business" is the subject of extensive case law and consideration must be given to the substance of the business pre- and post-transfer and the intentions of both parties when evaluating if the TOGC condition is met.

There has been no divergence in respect of the UK TOGC provisions since the UK left the EU on 31 December 2020, either through legislation or the courts. Retained EU law, both domestic and CJEU decisions, remain relevant in the UK in respect of TOGCs in accordance with Section 4 of the European Union (Withdrawal) Act 2018.

Contributors to this article: Giulia Trabattoni, Senior Associate (Rome); Martina Tranzocchi, Associate (Rome); Olivier Van Baelen, Counsel (Brussels); Kathryn Sewell, Senior Tax Advisor (London); Martin Morawski, Legal Director (Amsterdam); Thijs van Luijt, Associate (Amsterdam)

1 C-497/01, Zita Modes.

2 C-497/01, Zita Modes.

3 C-497/01, Zita Modes.

4 See Circular Letter No. 1997, n. 320

5 C-408/98, Abbey National.

6 Supreme Court decision No. 353/1990.

7 Supreme Court decision No. 24913/2008.

8 Supreme Court decision No. 9163/2010.

9 Ris. No. 417/2018.

10 Ruling No. 466/2019.

11 See ruling No. 609/2020.

12 See rulings No. 546 and No. 574/2020.

13 Ruling No. 151/2022.

14 See ruling No. 149/2021.

15 Supreme Court decisions No. 3888/2020 and No. 6067/2022.

16 Dutch Supreme Court, 28 September 2018, No. 17/00987.

17 Dutch Supreme Court, 29 January 2021, No. 19/00699.

18 Article 5(1)(a)(i) and Article 5(1)(b)(ii) of Value Added Tax (Special Provisions) Order 1995/126.

19 See paragraph 28 of HMRC v. Royal College of Paediatrics and Child Health et al. [2015] UKUT 0038.

20 See paragraph 40 of Intelligent Managed Services Ltd. v. HMRC [2015] UKUT 341 (TCC).

21 See paragraph 36 of Intelligent Managed Services v. HMRC [2015] UKUT 341.

22 Intelligent Managed Services v. HMRC [2015] UKUT 341.

23 See also Haymarket Media Group Ltd v. HMRC [2022] UKFTT 168 (TC)