C-497/01

2. In the present reference for a preliminary ruling, the Tribunal d'arrondissement de Luxembourg (District Court, Lux- embourg), wishes to know essentially 4. Article 5 defines supplies of goods. whether such a provision of national law Under Article 5(1), a supply of goods is to apply automatically whenever the means the transfer of the right to dispose recipient or transferee is a taxable person of tangible property as owner. However, or whether it might also be a condition that under Article 5(8): he should use the assets in continuation of the same business or type of business as that of the transferor and, if so, whether the Member State in question may or must require that he be in possession of an administrative authorisation to carry on such business. '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 1 — Original language: English thereof, Member States may consider that 2 — Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to no supply of goods has taken place and in turnover taxes - Common system of value added tax: that event the recipient shall be treated as uniform basis of assessment, OJ 1977 L 145, p. 1 (the Sixth Directive). the successor to the transferor. Where

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appropriate, Member States may take the The main proceedings necessary measures to prevent distortion of competition in cases where the recipient is not wholly liable to tax.'

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Milady had no administrative authori- who continues the whole activity of the sation to trade in the relevant sector. They transferor undertaking or continues the therefore reassessed the amount of VAT activity of the branch corresponding to owed by Zita Modes (which has now been the part of the totality of assets trans- wound up). ferred, or merely as meaning a transfer of a totality of assets or part thereof to a taxable person who continues the transferor's line of activity in whole or in part, without there being any transfer of an undertaking or branch of an undertaking? 10. Zita Modes (or its representatives) have challenged the reassessment before the Tribunal d'arrondissement which, before deciding the case, has sought a preliminary ruling by the Court on the following questions: 3. If the answer to any part of the second question is in the affirmative, does Article 5(8) of the Sixth Directive require or allow a State to require that the recipient's activity be pursued in ' 1 . Is Article 5(8) of the Sixth Council accordance with the licence issued by Directive 77/388/EEC of 17 May 1977 the competent authority for the activity on the harmonisation of the laws of the or branch of activity stipulated, assum- Member States relating to turnover ing that the activity pursued falls taxes - Common system of value added within lawful economic channels in tax: uniform basis of assessment - to be the sense contemplated in the case-law interpreted as meaning that the transfer of the Court of Justice?' of a totality of assets to a taxable person constitutes a sufficient con- dition for the transaction not to be made subject to value added tax, what- ever the taxable person's activity may be or whatever use he makes of the property transferred?

12. The tax authorities submit that the 15. First, considering the purpose of purpose of Article 9(2) of the Luxembourg Article 5(8) of the Sixth Directive, it cites VAT Law is to avoid the persistence of any the explanatory memorandum to its Pro- residual tax (rémanence de taxe) where the posal for a Sixth Directive, 6in which the transferee is a taxpayer only partly entitled option was described as being available 'in to deduct input tax, 4thus helping to ensure the interests of simplicity and so as not to the neutrality of VAT. overburden the resources of the undertak- ing'. The point is thus to avoid often large sums of tax being invoiced, paid to the State and then recovered by way of deduc- tion of input tax. It is the purpose of the second sentence, which was not in the original proposal, to allow Member States to make provision for cases where the transferee does not have a full right to deduct. Both parts of the provision are of course optional. Finally, the principle of the neutrality of VAT means that the appli- 13. If the transferee is to be deemed the cation of Article 5(8) must lead to exactly successor of the transferor, he must necess- the same result as if tax had been charged arily carry on the same type of business; and deducted in the normal way. otherwise, Article 9(2) of the VAT Law would be extremely difficult to apply and indeed practically deprived of any sense, particularly where adjustments relating to capital goods are concerned. 5That con- dition is thus implicit in both Article 5(8) of the Sixth Directive and Article 9(2) of the Luxembourg Law.

19. As has been correctly pointed out, the scope and effects of Article 5(8) must be 17. Turning to the national court's ques- determined in the light of its purpose. tions, the Commission considers it unnecessary that the transferee's business activity should be identical to that of the transferor. What matters is that application of Article 5(8) should lead to the same 20. That purpose must in turn be assessed result as if tax had been charged, paid and in the context of the VAT system as a subsequently recovered by way of deduc- whole, the essence of which is set out in tion of input tax; it is therefore necessary Article 2 of the First VAT Directive: 7 only that the transferee should be in a position to make such deductions, that is to say that he should be a taxable person who uses the assets transferred for the purposes of his taxable transactions. 'The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged. 18. As regards the fact that Milady was not licensed to carry on the same business as Zita Modes, the Commission points out that according to case-law an unlawful business activity is not removed from the sphere of VAT as long as it may in some On each transaction, value added tax, way compete with lawful activities. If calculated on the price of the goods or however the application of Article 5(8) in services at the rate applicable to such goods such a case were liable to lead to a and services, shall be chargeable after distortion of competition, a Member State would be entitled to adopt corrective measures pursuant to the second sentence 7 — First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning of the provision. turnover taxes, OJ, English Special Edition 1967, p. 14.

8 — Certain domestic transactions are exempted from VAT under Article 13 of the Sixth Directive, while Articles 14 to 22. However, such deduction is not appro- 16 provide for exemptions in international trade. At least in priate where the input tax has been paid on domestic trade, however, the fact that a given transaction is exempted does not mean that preceding transactions in the supplies which are not used to produce same chain of supply are also exempted; rather, the tax paid at the earlier stages can no longer be recovered by way of taxable outputs. Such situations include deduction, even though the justification may in that case be cases where a taxable person uses supplies more questionable where the exempt supply becomes a cost component of a subsequent taxable supply. for his own private purposes (and thus acts 9 — Article 20(1)(b). as a final consumer) or for making onward 10 — Article 20(2).

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24. Leaving to one side for the moment the even though it cannot ultimately be question of what precisely constitutes 'a retained by the tax authorities. 11 totality of assets or part thereof' and regarding it more generally as meaning 'a business', I agree essentially with the Com- mission in its view of the role of Article 5(8) in that context.

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which deliberately go into liquidation leav- Member States exercising the option could ing a substantial tax debt and no resources, also take steps to prevent any distortion of the authorities would otherwise still have competition in such cases. to allow the transferee to deduct the input tax, with a net loss of tax revenue.

29. However, the aim is justified only where the transferee would in any event 31. In that sentence, the phrase 'not wholly have been able to deduct the VAT charged. liable to tax' may in my view be taken to If the business which he acquires is used include situations where the recipient is not wholly or partly to make exempt supplies, liable to tax at all. The condition in that would not (fully) be the case. And if no Article 9(2) of the Luxembourg VAT Law VAT were payable on the acquisition, he that the transferee must be a taxable person might gain an unjustified competitive can therefore be justified at least on that advantage over other operators making basis even in the absence of any explicit the same type of exempt supplies. Another condition in Article 5(8) of the Sixth such situation would be where (primarily Directive itself - although such a condition capital) goods, the VAT on which had might also be regarded as already implicit already been fully deducted by the trans- in the scheme of the provision. feror, were acquired by the transferee at a price free of any of the tax which would have been residual therein if they had been acquired in other circumstances, and where the transferee would not himself have been fully entitled to deduct. 13

33. In the light of the purpose of Article 5(8) as explained above, we may consider its scope and the type of trans- action to which it may apply. 36. It follows in my view that the concept of 'part of a totality of assets' relates not to one or more individual elements from that list but to a sufficient combination thereof to allow the pursuit of an economic activ- ity, even if that activity forms only part of a larger business from which it has been detached. 34. Where a totality of assets is concerned, there is little difficulty. The transfer in question is that of a business as a whole which as the Commission has pointed out will comprise a number of different elements. For example, the French term fonds de commerce, used on the invoice in the case in the main proceedings, has been 37. That may be contrasted with a case in defined in legal dictionaries 14 as including which a retailer closes one of his outlets elements both corporeal (such as plant, and sells its stock to another trader, or a equipment and stock-in-trade) and incor- service firm discontinues one type of service poreal (such as the tenant's interest in a and disposes of the relevant equipment to a lease, the trade name or sign, patents, trade competitor. Such transactions might be marks and goodwill). One might add trade argued to fall within the literal meaning secrets, business records, customer lists, the of 'transfer of part of a totality of assets' benefit of existing contracts and so forth. but so, in that case, could any sale of any asset. In the light however of the purpose of Article 5(8), it seems clear that they do not and that what is meant is the transfer of a self-standing part of a more extensive busi- ness.

of VAT payable in the course of all his 40. The approach summed up in paragraph economic activities 15 - the 'principle of 36 above is consistent, as the Commission neutrality' - its operation in fact normally points out, with definitions given in other requires traders in effect to advance sums contexts by both the Court and the legis- (levied on their input supplies) which they lature. In Commerz-Credit-Bank, 16 the later recover by retaining a proportion of Court defined 'part of a business' for the the tax (on their output supplies) paid by p u r p o s e s of C o u n c i l D i r e c t i v e their customers. Such rolling advances may 69/335/EEC 17 as 'an aggregate of assets be viewed as acceptable in the normal and persons capable of contributing to the course of trade, but it is appreciably more performance of a specified activity'. And burdensome for the new owner of a busi- Council Directive 2001/23/EC 18 defines a ness to have to advance tax on its whole 'transfer of an undertaking, business, or value and on a single occasion. part of an undertaking or business' as 'a transfer of an economic entity which retains its identity, meaning an organised grouping of resources which has the objec- tive of pursuing an economic activity, whether or not that activity is central or ancillary'.

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reflected the Court's case-law in Spijkers 20 43. The above considerations may assist and Redmond Stichting, 21to the effect that the national court in deciding the essential the decisive criterion for establishing the issue whether the assets transferred by Zita existence of such a transfer is whether the Modes to Milady constituted a totality of entity in question retains its identity, as assets or part thereof within the meaning of indicated in particular by the fact that its Article 5(8) of the Sixth Directive. operation is actually continued or resumed, and that it is necessary for that purpose to look at all the characteristics of the trans- action, including the type of undertaking or business, whether or not its tangible assets are transferred, the value of its intangible assets, the extent to which staff are taken over by the new employer, whether cus- tomers are transferred, the degree of simi- larity between the activities carried on before and after the transfer and the period, Need to carry on the same type of business if any, for which those activities were as the transferor suspended - all those circumstances being, however, merely individual factors in the overall assessment.

44. First, it may be noted that Article 5(8) is couched in general terms and imposes no requirement as to the use to be made of the 'totality of assets or part thereof' following the transfer. In principle, therefore, require- ments should not be read into it without some imperative reason to do so.

49. Second, although the transfer itself will not have attracted VAT, tax will normally have been paid (and not yet deducted) on at 46. There does not in fact appear to be any least some of the assets transferred and will conflict between the two types of formu- be passed on in the transfer price. Had he lation. Read together, they clearly refer to retained the business, the transferor would the notion of universal succession, in which have been entitled to deduct that tax in one person takes over all of the rights and accordance with Article 17 and, following obligations of another (here, of course, the transfer, the transferee will be in the limited to all of the VAT rights and same position - subject to the same require- obligations in relation to the business ment that the supplies on which input tax transferred). was paid be used for the purposes of taxable output supplies. Conversely, any VAT debt owed by the transferor will become the responsibility of the transferee, who will also be the person concerned by any subsequent adjustments made, in accordance with Article 20 of the Sixth Directive, in respect of tax originally paid by the transferor. 47. That being so, I would disagree with the tax authorities' view, at least in the restrictive terms in which it appears to be put to the national court.

50. For that to be the case, it is not essential that the transferee should carry on exactly the same type of business as the transferor. His position will admittedly be affected if 48. First, as the Commission points out, it he switches between making taxable and is clear from the wording of Article 5(8) exempt output supplies, but no more than that treating the transferee as the successor would have been the case for the transferor

52. Article 5(8) allows Member States some latitude in that they may take meas- ures to prevent distortion of competition in cases where the recipient is not wholly liable to tax. However, that latitude appears to be thus circumscribed and not to extend to measures whose aim is other than that of preventing distortion of com- petition or to cases where the recipient is 54. That having been said, the purpose of wholly liable to tax. A general rule requi- Article 5(8) and the concept, viewed in the ring the transferee to carry on the same light of that purpose, of a 'transfer of a type of business as the transferor would not totality of assets or part thereof' in any appear at first sight to fall within those event presuppose that a business is trans- limits.

23—See Case C-400/98 Breitsohl [2000) ECR I-4321, at 22 — For examples, see paragraph 29 above. paragraph 43 et seq. of the judgment.

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Need to possess administrative authori- sation to carry on the type of business in question 58. Thus, whatever other effects may ensue in national law from Milady's alleged lack of authorisation to pursue the economic activity inherent in the business assets it 56. By its third question, the national court acquired from Zita Modes - which, it seems asks in substance whether the fact that the to be agreed, do not involve any intrinsic transferee is not authorised to pursue the illegality - the VAT situation is unaffected, type of economic activity which he does whether in relation to the transfer of assets pursue in relation to the business assets itself or in any other regard. transferred has any effect on the appli- cation of the option in Article 5(8) of the Sixth Directive. 25 — See, in particular, Case C-455/98 Salumets [20001 ECR I-4993, at paragraphs 19 to 24 of the judgment, together with the case-law cited at paragraph 19; see also para- graphs 15 to 21 of Advocate General Saggios' Opinion. 26 — Case C-349/96 Card Protection Plan [1999] ECR I-973, at 24 — See paragraph 41 above. paragraphs 35 and 36 of the judgment.

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Conclusion

59. I am accordingly of the opinion that the Court should answer the questions raised by the Tribunal d'arrondissement de Luxembourg, as follows:

(1) Where a Member State has exercised the option in Article 5(8) of the Sixth VAT Directive, it must consider that no supply has taken place whenever there is a transfer of a totality of assets or part thereof within the meaning of that provision, subject only to any limitations contained in national measures designed to prevent distortion of competition in cases where the transferee is not wholly liable to tax.