C-137/02

2. Germany has exercised that option and, in the present reference for a preliminary ruling, the Bundesfinanzhof (Federal 3. The essence of the VAT system is set out Finance Court) seeks guidance on the in Article 2 of the First VAT Directive: 3 application of the rule to a particular type of civil-law partnership (Vorgriindungsge- sellschaft GbR) created for the sole purpose of setting up — but not operating — the business of a limited company yet to be formed and transferring that as yet non- 'The principle of the common system of operational business to it once formed. The value added tax involves the application to issue to be resolved is whether — and if so, goods and services of a general tax on on what basis — either the partnership itself consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take 1 — Original language: English. 2 — Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: 3 — First Council Directive 67/227/EEC of 11 April 1967 on the uniform basis of assessment, OJ 1977 L 145, p. 1 ('the Sixth harmonisation of legislation of Member States concerning Directive'). turnover taxes, OJ, English Special Edition 1967, p. 14.

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place in the production and distribution the purpose of obtaining income therefrom process before the stage at which tax is on a continuing basis'. Under Articles 5 to charged. 7, taxable transactions are supplies of goods, supplies of services or imports.

FAXWORLD

8. The essentials of the right to deduct are cost component of a subsequent taxable set out in Article 17 of the Sixth Directive. supply. Input tax may thus in some situa- Article 17(2) states: 'In so far as the goods tions become 'locked' in the value of the and services are used for the purposes of his supply with the result that, contrary to the taxable transactions, the taxable person normal operation of the system, the value shall be entitled to deduct from the tax on which VAT is charged at later stages which he is liable to pay (a) value added tax includes the tax charged at earlier stages. It due or paid in respect of goods or services might be said that the chain of transactions supplied or to be supplied to him by is broken off, and a new chain commences another taxable person ...' That entitlement with a higher net value. A similar situation arises, in accordance with Article 17(1), at may occur where goods are bought by a the time when the deductible tax becomes taxable person in a private capacity (not chargeable. 'acting as such' within the meaning of Articles 2 and 4(1)) but are then transferred into the sphere of his economic activity. 5

9. Certain transactions are however exempted from VAT under Articles 13 to 16. No VAT is chargeable on any exempted transaction, and it follows furthermore from Article 17(2), which limits the right of deduction to tax on supplies used for the purposes of taxable transactions, that the supplier is precluded from deducting any input tax on supplies used for the purposes The Court's interpretation of the Commu- of such transactions made within the nity provisions Community. 4

12. Of relevance to the present case are the 14. Abbey National concerned the sale judgments in Rompelman, 6 INZO, 7 Ghent between unrelated companies of a building Coal Terminal, 8 Gabalfrisa, 9 operated as a rental business subject to Schloßstraße 10 and Breitsohl, 11 to the VAT. It was sold as a going concern which effect that whenever a person has the was one part of the transferor's overall intention, confirmed by objective evidence, business. A major issue in the case was to commence an economic activity and whether the transferor could deduct input acquires initial taxed supplies for that tax on (essentially legal) services acquired in purpose, he must be regarded as a taxable order to effect the transfer. person acting in that capacity and as having the right immediately to deduct the VAT on supplies acquired for the purposes of his intended taxable transactions, without hav- ing to wait for the actual exploitation of the business to begin and even if it does not in fact begin.

15. The Court noted that the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities, ensuring complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT. However, to give rise to the right to deduct, the goods or services acquired must have a direct and immediate link with a taxable output transaction — they must form part of the costs of that transaction. 14

Article 2 of the Sixth Directive such a expenditure incurred for the purposes of a transfer is not subject to VAT, and cannot business before it is actually operated and constitute a taxable transaction within the during its operation and, on the other hand, meaning of Article 17(2). The fact that it expenditure incurred in order to terminate would have been a taxable transaction if its operation. Thus in principle services the option had not been exercised is used by the transferor for the purposes of irrelevant. Nor is there a direct and the transfer of a totality of assets or part immediate link with the transferee's taxable thereof have a direct and immediate link output transactions. Deduction is only with his whole economic activity. 16 possible where the output transactions are those of the taxable person seeking to deduct; in any event, costs involved in effecting the transfer do not directly burden the cost components of the transferee's taxable transactions, as required by Article 2 of the First Directive. 15 18. The questions in Zita Modes focus on the definition of a 'transfer of a totality of assets' and on the need — or otherwise — for the transferee to carry on the same business as that previously pursued by the transferor. Judgment has not yet been delivered in that case.

20. Paragraph 1(1a) of that Law provides: 23. Certain aspects of German company 'Transactions in the context of the transfer law are also relevant to this case. The of a business (Geschäft) to another trader referring court explains them as follows. (Unternehmer) for the purposes of his undertaking (Unternehmen) are not subject to turnover tax. A transfer of a business takes place where an undertaking or a separately managed business unit forming part of an undertaking is in its entirety transferred, whether for consideration or 24. An Aktiengesellschaft (company lim- not, or brought in as a contribution to a ited by shares — 'AG') does not acquire company. The recipient trader takes the legal personality until it is entered in the place of the transferor.' commercial register. A necessary prelimin- ary stage is the Vorgesellschaft (pre-regis- tration company), a sui generis association of persons which always comes into exis- tence when the company statutes are established. The Vorgesellschaft may itself be preceded by a Vorgründungsgesellschaft based on an agreement between the foun- ders of the company to cooperate with a view to its formation, usually in the form of 21. For those purposes, 'trader' and a civil-law partnership (Gesellschaft bür- 'undertaking' are defined in Paragraph 2: gerlichen Rechts — 'GbR'), the purpose 'A trader is any person who independently being to regulate the liability of the persons carries out a commercial or professional involved. Where a Vorgründungsge- activity. An undertaking comprises the sellschaft is set up to prepare a company's whole of a trader's commercial or profes- subsequent activities, its assets, rights and sional activity. Commercial or professional duties are not automatically transferred to activity means any sustained activity carried the Vorgesellschaft and subsequently to the out for the purpose of obtaining income, company when it is formed; if such a even where there is no intention to make a transfer is to take place it must be effected profit or an association carries out its by a separate legal transaction. activities only in relation to its members.'

'Is a partnership which has been established for the sole purpose of forming a limited company entitled to deduct input tax paid on goods and services procured by it if, 27. Faxworld GbR subsequently sought to after that company has been formed, that deduct — that is to say, in the circum- partnership effects by formal act a transfer stances, obtain reimbursement of — the for consideration of the procured goods input tax incurred on the supplies it had and services to the subsequently founded acquired and transferred. The tax authority limited company and, from the outset, did refused the deduction on the ground that not intend to carry out any other output the claimant's only output transaction was transactions and if, in the Member State a transfer of a business, which is not to be concerned, a transfer of a totality of assets treated as a taxable transaction, and that is not deemed to be a supply of goods or Faxworld GbR was therefore not a trader services (first sentence of Article 5(8) and (taxable person). Faxworld GbR challenged Article 6(5) of the [Sixth Directive])?'

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29. The Bundesfinanzhof also indicates of the neutrality of VAT must mean that the that, if the partnership has no right to right to deduct is not determined by deduct in those circumstances, any need for national differences in legal form. a further reference could be obviated if the Court were further to rule whether the limited company instead could have such a right.

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FAXWORLD

contrast that Faxworld GbR and Faxworld tion of economic activity and thus within AG are two separate persons, and that the scope of the VAT system. However, Faxworld GbR is not a taxable person, since those goods and services were not never having carried out or had the inten- used by that partnership for — and can tion to carry out either any economic have no direct and immediate link with — activity within the meaning of Article 4 of any taxable output transactions of its own, the Sixth Directive or any taxable transac- Faxworld GbR has no right to deduct the tion within the meaning of Articles 5 or 6. input tax thereon. On the other hand, in the There can thus be no question of any right Commission's view, Faxworld AG, as to deduct since, essentially, there is no 'successor' to Faxworld GbR within the person who could enjoy such a right and meaning of Article 5(8) of the Sixth no transaction within the VAT system from Directive, and having used the same goods which a deduction could be made. The and services for its taxable outputs, does German Government relies significantly on have a right to deduct. Such a solution is Abbey National in that regard. not contrary to the judgment in Abbey National, which dealt only with the transferor's right to deduct, and not the transferee's.

40. The partnership was not set up for the purpose of effecting taxable output transac- tions, it did not effect any and there was at 37. From an economic point of view, it no stage any intention that it should do so. seems clear, a single business has been set Its sole actual or intended output transac- up, going through various preparatory tion was to sell the embryo, as yet non- stages before becoming operational. The operational, business to the limited com- continuity of the business from preparatory pany. By virtue of the German legislation to operational stages — the continuity of its implementing Article 5(8) of the Sixth identity as a business — does not appear to Directive, that transaction was not tax- be in any doubt. The normal operation of able. 20 the VAT system requires that input tax on supplies acquired by a business at both preparatory and operational stages be deductible from its output tax. 18

41. None the less, I agree with the Com- mission that Faxworld GbR falls within the definition of taxable person in Article 4(1) 38. Any deviation from that normal opera- of the Sixth Directive. Its activities were tion, and therefore from the principle of undoubtedly economic in nature and neutrality, can in my view be accepted only neither the purpose nòr the result ofthose A where there is clear authorisation in the activities is relevant. In that context, I legislation, as interpreted where appropri- consider the German Government to be ate by the Court. mistaken in its reference to Lennartz 21 a case which concerned acquisition for pri- vate use of goods subsequently used for

45. As I said in my Opinion in Zita Modes, 25 the various formulations clearly recall the notion of universal succession, in which one person takes over all of the rights and obligations of another (limited in this 43. None the less, although the partnership context to all of the VAT rights and and the limited company in the present case obligations in relation to the business are two separate legal persons, there is not transferred), so that the transferee acquires, only a perceptible economic continuity with the business, any outstanding VAT between them but also a degree of legal debts and the right to deduct any input tax continuity. not already deducted against output tax on taxable t r a n s a c t i o n s . 26 In Abbey National27I suggested, using the common metaphor of a chain of transactions for VAT purposes, that whilst one link in the chain is deemed not to exist, the result is not — as would be the case for an exempt transaction — a break and a recommence- 44. Article 5(8) requires that, if no supply ment of the chain but rather a continuing is considered to have taken place, the recipient should be treated as the 'successor' to the transferor. In the German version of 24 — See paragraph 31 above. Article 5(8), the comparable word 25 — At paragraphs 46 and 49. 26 — It appears however that the VAT rules in some Member States require the transferor to settle all outstanding VAT accounts prior to the transfer, so that the 'succession' in such cases is confined to adjustments pursuant to Article 22 — Cited in note 7, paragraphs 19 and 20 of the judgment. 20 of the Sixth Directive. 23 — Cited i nnote 14, paragraphs 17 and 24 of the judgment. 27 — At paragraph 38 of the Opinion.

50. If input VAT borne by the assets of a transferred business could not be deducted, there would be not inconsiderable distor- 48. None the less, I am of the view that the tion of competition, in comparison with 'succession' provision in Article 5(8) not only justifies but requires the drawing of a significant distinction between the situation 30 — In paragraph 10 I have outlined the undesirable effects which such transactions may entail 31 — Bulletin of the European Communities, Supplement 11/73, at p. 10; what is now the first sentence of Article 5(8) was Article 5(4) in the original proposal. 28 — Cited in note 5, at paragraph 8 of the judgment. 32 — See, for a somewhat fuller consideration, paragraphs 19 to 29 — See paragraph 41 above. 32 of my Opinion in Zita Modes.

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other businesses. And, as the Court reiter- 52. That being so, it seems obvious that the ated in Abbey National, 33 the deduction best modus operandi from a practical point system is meant to relieve the trader entirely of view is that, where national law allows, of the burden of the VAT payable or paid in the consideration for the transfer should the course of all his economic activities, always in such circumstances cover the full ensuring complete neutrality of taxation of value of the assets transferred, including all economic activities, whatever their any input VAT which has not yet been purpose or results, provided that they are deducted. Indeed in most cases it will be themselves subject in principle to VAT. difficult if not impossible to isolate the presence (or absence) of such an element in the price.

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— as the German Government pointed out cost components of the transferee's taxable at the hearing — give the former an transactions. None the less, such costs form unjustified financial advantage; it would part of the overheads of the transferor's also leave the latter with an irrecoverable business and as such are cost components tax burden. Where on the other hand the of the products of that business; the burden of input VAT is passed on in the transferor thus enjoys a right to deduct on transfer price, the right to deduct must vest that basis. in the transferee. To proceed otherwise would again entail distortion of competi- tion, an outcome which, in addition to being inconsistent with the principles of the VAT system and Community law in gen- eral, is specifically referred to in Article 5(8) as worthy of prevention.

57. I view that reasoning however as specific to the circumstances of Abbey National. The tax in issue in that case was payable on services acquired for the pur- poses of effecting the transfer, and not on the assets actually transferred. Those latter assets, in issue in the present case, clearly do form cost components of the transferee's 55. In the present case, therefore, it is transactions, and the continuity of person- Faxworld GbR and not Faxworld AG ality as between the transferor and his which must enjoy the right to deduct. successor, the transferee, justifies treating input VAT on their acquisition as giving rise to a right to deduct on that basis.

— a Member State has made use of the option in Articles 5(8) and 6(5) of the Sixth VAT Directive, so that a transfer of a totality of assets is treated as not being a supply of goods or services, and

— goods and/or services are acquired by one natural or legal person (the transferor) for the sole purpose of setting up but not operating a business, and of transferring the assets of that business to another natural or legal person (the transferee) who intends to use those assets to carry out taxable transactions,

the right to deduct VAT paid or payable on the goods and/or services acquired vests in principle in

— the transferor where the burden of the tax has not been passed on to the transferee in the transfer price, and

— the transferee where the burden of the tax has been passed on to him in the transfer price. I - 5563