Going concern transfers: General Court clarifies VAT consequences of retaining business premises

The transfer of a business or of an independent part of a business is one of the most common transactions in commercial practice. From a VAT perspective, such transactions may fall within the scope of Article 19 of the EU VAT Directive, under which the transfer of a totality of assets is not regarded as a supply of goods and is therefore outside the scope of VAT.

Business reality, however, is rarely straightforward. It is common for the transferor to retain ownership of the property from which the business operates while leasing it to the purchaser, allowing the latter to continue carrying on the same economic activity. This very common commercial structure, on which there has been no uniform approach across the EU member states, has now been examined by the General Court in Case T-397/25.

The case concerned a company that transferred its business to another entity under the transfer of a totality of assets regime. The property from which the business was operated, however, was not included in the transaction. Instead, the seller retained ownership of the premises and entered into a lease agreement with the purchaser so that the latter could continue operating the same business from the same location.

The tax authorities took the view that this arrangement required the transferor to adjust the input VAT previously deducted on the acquisition, construction, and improvement of the property. In their view, the property had ceased to be used for taxable activities and was now being used to make an exempt supply (the leasing of property). The company argued that, since the business continued without interruption and the transaction qualified as a transfer of a totality of assets under Article 19 of the VAT Directive, no such adjustment should be required.

The court had to determine whether the lease agreement entered into simultaneously with the transfer of the business formed part of that transfer and could therefore benefit from the same VAT treatment. If the answer was yes, the legal fiction under Article 19 whereby the transferee is treated as the successor to the transferor could prevent any adjustment of the input VAT previously deducted. If, on the other hand, the lease constituted a separate transaction, the VAT consequences would be entirely different.

The General Court held that a lease agreement does not form part of the transfer of a totality of assets where the lease right is created only as a consequence of the business transfer itself. In such circumstances, the lease is not an existing right transferred together with the business but rather a new contractual relationship entered into between the parties, with its own legal and VAT treatment.

This conclusion has important practical consequences. Since the lease constitutes an independent transaction, it does not fall within the continuity fiction established by Article 19 of the VAT Directive. As a result, the transferor is regarded as using the property to carry out an exempt leasing activity and is therefore required to adjust the input VAT previously deducted on that investment, even though the purchaser continues to use the property for exactly the same taxable business activity as before the transfer.

The importance of this judgment extends beyond the facts of the case. The structure examined by the court (transferring the business while retaining ownership of the property and leasing it to the purchaser) is extremely common in business acquisitions, often for commercial, financial, or asset protection reasons.

Until now, there had been no consistent approach across the member states as to the VAT consequences of such arrangements. Some considered the lease to be a natural extension of the business transfer, capable of benefiting from the transfer of a totality of assets regime, while others regarded it as a separate transaction.

The General Court supports the latter view. Creating a contractual relationship that did not exist before the transfer may place that element of the transaction outside the scope of Article 19 of the VAT Directive, even where it is essential to ensure the continuity of the business.

From a practical perspective, the judgment highlights the need to examine carefully the legal structure of business transfers. A decision that may appear commercially incidental, such as retaining ownership of the business premises and leasing them to the purchaser, can have significant VAT consequences, particularly where it triggers an adjustment of previously deducted input VAT.

This judgment therefore provides much-needed legal certainty on an issue that has generated uncertainty and is likely to become an important reference point for future business transfer transactions throughout the EU.