Transfer of ongoing business and French VAT: everything you need to know about the application of article 257 bis of the FTC

When is the transfer of a business exempt from VAT?

What does article 257 bis of the FTC say?

Article 257 bis of the FTC provides for an exemption from VAT for supplies of goods and services made between taxable persons, when they occur as part of the transfer of a universality of goods (all or part of a business).
The objective is to prevent VAT from constituting an obstacle to the transfer of businesses by facilitating the resumption of economic activity.

To benefit from this exemption, the transfer must:

• Focus on a set of coherent elements allowing the purchaser to continue an activity.
• Be carried out between two taxable persons liable for VAT.
• Accompanied by an intention to continue the operation by the transferee.

Attention: If the transaction does not meet these criteria, it will be subject to VAT at the standard rate of 20%.

What is a “universality of goods”?

According to European case law (CJEU, Zita Modes SARL judgment, C-497/01), a universality of assets corresponds to a set of tangible and intangible assets constituting an autonomous economic entity.

It is therefore not only a question of transferring stock or equipment, but an activity capable of being continued by the purchaser.

• Examples of universality transfers exempt from VAT:
  • Contribution of a business to a company with continuation of activity.
  • Sale of a complete branch of activity (merger, division).
  • Universal transfer of assets (Transfer of ongoing concern) in the event of dissolution without liquidation.

• Examples of transactions subject to VAT:
  • Sale of a stock of goods without resuming operations.
  • Sale of a building alone, even if it was used as part of an economic activity.

In summary: To benefit from the exemption, you must sell an activity, and not isolated assets!

Does VAT apply when only certain elements of the business are sold?

If the transfer does not concern the entire fund but only certain elements (customers, brand, equipment), article 257 bis of FTC does not apply systematically. It is then necessary to distinguish between situations.

How is the sale of intangible items (customers, brands, patents) handled?

Intangible items are often the essence of a business.

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When sold separately, VAT applies in the majority of cases.

• Examples of items subject to VAT:
  • Sale of a customer base (e.g. sale of a client portfolio by a consultant).
  • Sale of a brand or commercial name.
  • Transfer of the right to use a patent or software.

However, VAT does not apply if the transfer is subject to registration fees.

What is the VAT rate for the transfer of material goods?

The material assets of the business (stocks, furniture, equipment) follow different rules:

• Inventory is always subject to VAT, unless sold with the activity.
• Equipment and materials are taxable if they are eligible for deduction.
  

Special case of buildings registered in stock: If a building is sold alone, without transmission of activity, VAT is due. On the other hand, if the transfer is part of a transfer of business, it may be exempt.

Tip: It is essential to clearly identify the nature of the items transferred to avoid tax treatment errors, especially when it comes to a transfer of real estate.

What are the cases where the transfer is still subject to VAT?

Some transactions are exempt from VAT, even if they concern an economic activity.

When VAT applies:

• Sale of an isolated asset with no associated activity (building, equipment).
• Sale of an activity not subject to VAT (e.g.: a liberal professional not subject to VAT).
• Lack of continuity in operation by the purchaser.

Practical example:

A company sells its restaurant, but the purchaser does not plan to operate it and only wants to recover the equipment for another project. In this case, VAT applies, as it is not a universal transmission.

Conclusion: how to secure your transfer of business assets?

The application of VAT during a transfer of business depends on numerous criteria.
Thanks to article 257 bis of the FTC, it is possible to avoid the application of VAT, but only if the transfer concerns an autonomous economic activity and the purchaser continues to operate it.

Are you planning to sell or buy a business and want to secure the transaction from a fiscal point of view?

The experts at Cyplom Avocats support you at every stage to optimize your transaction.

Contact us now for a personalized consultation!

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