The going concern value-add tax (VAT) relief for VAT purposes can be granted in case of a share deal (transfer of a subsidiary) if the transferred company is part of a VAT group on the side of both the seller and the buyer. In the case at hand, however, the court refused to accept the relevant VAT group, as the required domination of the subsidiary failed due to an insufficient "managing directors' resolution" (this concept is regularly used in practice; hence, companies should review their VAT group structures).
The sale of shares in corporations is generally exempt from VAT. The seller did not make use of an option for VAT (which would have been possible under German law). Nevertheless, the seller deducted input VAT from consulting services pertaining to the sale of the shares. The tax office refused to allow this input VAT deduction. To save the input VAT (i.e., to be able to make a connection between the consulting services and its overall taxable activity), the seller took the position that the share deal constituted a nontaxable transfer of a going concern.
A transfer of a going concern requires a taxable business (or part of a taxable business) to be transferred and actually continued by the purchaser. According to rulings from the European Court of Justice and the German Federal Tax Court, the mere transfer of all the shares in a company is not a transfer of a going concern in and of itself. Although the ownership of a company is being transferred, the taxable business is still managed by the transferred company itself (and not by an acquirer that is merely holding the subsidiary).
In the case at hand, however, the subsidiary was integrated into the seller's VAT group — therefore a part of the seller's taxable business. If the subsidiary had also become part of a VAT group on the side of the purchaser, then the taxable business of the subsidiary could have been attributed to the purchaser, which would have resumed the taxable activity accordingly. The purchaser's VAT group ultimately failed due to lacking an organizational link. Consequently, the subsidiary regained its independence under VAT law at the moment of the share transfer. The transferred taxable business could not be assigned to and resumed by the purchaser for this reason.
The organizational link in a VAT group requires the controlling company to actually exercise the control associated with the financial link (a sufficient amount of voting shares to have control in shareholder meetings) in the daily management of the controlled company. The strongest form of an organizational link is the personal identity of the management between the two companies. Without a personal identity, other institutionally secured measures can bring about the organizational link, for example, a managing directors' resolution.
The Tax Court of Nuremberg did not deem the managing directors' resolutions that existed between the purchaser and the transferred company sufficient for an organizational link. In particular, the agreed general reporting obligations of the managing directors, the requirements to seek approval for "decisions going beyond ordinary business operations" and the lack of a final decision-making right of the controlling company (with no possible liability claims against the managing directors for misconduct) made the court take the view that the purchaser could not exercise control in the core area of the ongoing business operations in a legally binding manner. The fact that the existing approval requirements should be adjusted (i.e., reduced) to a reasonable level after the managing directors have gotten familiar with the business was understood by the court to mean that, in reality, a certain autonomy of the management was intended.
The present judgment shows that a managing directors' resolution is a risky instrument for establishing an organizational link. So far, local case law has only stipulated which kinds of agreements are not sufficient, but there is no guidance on what should be acceptable terms in practice. Therefore, taxpayers do not yet have sufficient legal certainty on this issue. Ideally, the organizational link should instead be established through the identity of the management or at least through a managing director of the controlled company who is (also) employed by the controlling company. A domination agreement also provides more legal security than a managing directors' resolution. If only a managing directors' resolution is appropriate or possible to establish organizational links in an individual case, then the application for the binding information should be considered, as tax offices have cooperated in the past and approved of such setups.
This judgment gives cause to review existing managing directors' resolutions in cases where the organizational link in a VAT group is based on this rather weak form of integration. If it is determined that a managing directors' resolution does not provide the controlling company with sufficient possibilities to exercise control in the ongoing business operations, the subsidiary, which is then independent under VAT law, would have to declare its turnover and input VAT amounts on a stand-alone basis. The VAT returns of the controlling company would also need to be corrected.
Further, in this judgment, the VAT issues on the side of the purchaser (namely, the failed VAT group) led to the denial of input VAT on the side of the seller. Whenever the VAT treatment of a supply depends on the behavior of the purchaser, the seller should insist on a guarantee or an indemnification clause in the transfer agreement to hold itself harmless if the purchaser fails to avoid unnecessary VAT assessments.
