Sale of a property leased to and subleased by the buyer can be a transfer of a totality of assets - BFH ruling XI R 8/19

Tenant (who subleases to third parties) buys the property and continues to rent it out

In the facts underlying the decision, the plaintiff had leased a plot of land which he used partly for his own business and partly sublet. The owner of this land (A) later sold it to the plaintiff (the previous tenant). The previous lease agreement between A and the plaintiff thus expired. The plaintiff, as the new owner, continued to use the property for his own business and to rent it out (formerly sublet it).

Federal Fiscal Court (Bundesfinanzhof, BFH): Identity of tenancy relationships not required for the sale of a business as a whole

The BFH ruled that the sale of the property in relation to the part of the property leased by the plaintiff was a partial, non-taxable sale of a totality of assets pursuant to Section 1 (1a) of the German VAT Code. The tax office and the tax court had previously rejected this with the argument that the lease agreement existing between A and the plaintiff had not been transferred upon the sale of the property – that was not possible in the present constellation as the plaintiff could not lease to himself.

Referring to ECJ case law, the BFH stated that the non-taxable (partial) sale of a totality of assets requires the transfer of a business (or part of a business) with which an independent economic activity can be continued. The acquirer must intend to operate the transferred business or part of the business; however, he may change or modernise it in the process.

Against this background, a sale of a totality of assets could not be considered with regard to the part of the property used for the plaintiff's own business, because A operated a rental business with it, whereas the plaintiff operated a business for his own use.

However, the plaintiff had continued A's rental activity with regard to the part sublet by himself before the sale. The fact that the original tenancy between A and the plaintiff had expired as a result of the sale and could therefore not be transferred in concrete terms was irrelevant. It was sufficient that the business activities before and after the sale were sufficiently similar. Accordingly, the continuation of the rental activity was required, not the continuation of a concrete rental agreement.

Decisive: Does the acquirer take over the existing rental activity or does he establish his own?

The BFH distinguished the present case from a factual constellation that formed the basis of one of its earlier decisions: Its ruling of 3 July 2014 (V R 12/13 (NV)) concerned the sale of a rented property in which the purchaser immediately rented the property to the former owner. The latter then continued to rent to his previous tenants - now no longer as owner, but in the form of an interim tenancy. In this case, the BFH ruled that there was no transfer of a business or part of a business as part of a sale of a totality of assets because the previous tenancies had not been transferred to the acquirer and the seller had continued to run his rental business himself after the sale. The acquirer had not taken over a rental business but had rather established its own rental business.

Classification, practical advice

The decision from 2021 is not particularly surprising. The BFH had already ruled several times that the continuation of the concrete rental agreement is not necessary in every case. The special feature of this particular case was solely the confusion under civil law, i.e., the coincidence of landlord and tenant in one person after the sale.

However, the rulings from 2021 and 2014 in comparison show how carefully the sale of real estate and its classification as a sale of a totality of assets must be examined. The two cases have in common that the seller operated a rental business before and the buyer after the sale, even if the concrete rental relationships were not identical. The difference is very subtle in that if the legal relationships are structured in such a way that the seller ultimately retains the same rental relationships, the BFH denies the transfer of a business necessary for a sale of a totality of assets.

In cases of doubt, it is advisable to obtain a binding ruling before the sale, provided there is enough time for this. Otherwise, particular attention should be paid to the design of the VAT clause, which may vary depending on the interests involved.

(Dated: 6 August 2021)