Coordination Committee: When can the sale of real property be treated as losing rights to a business establishment from a VAT perspective?

The Czech Chamber of Tax Advisors submitted a paper for discussion to the Coordination Committee of the General Financial Directorate (GFD) and the Chamber of Tax Advisors dealing with when, from a VAT perspective, a transaction can be treated as a sale of real property and when a loss of rights to a business establishment.

Imagine the following situation: A seller decides to sell real property they have held for a long time, with its premises having been leased to several tenants. The buyer plans to continue to lease out the property; therefore, the seller will transfer the property including lease contracts, i.e. the buyer will replace the seller as the lessor in the existing contracts. 

In assessing whether the above transaction involves just a sale of real property or also a loss of rights to a business establishment, the GFD drew attention to the existing case-law of the Court of Justice of the EU, according to which the loss of rights to a business establishment must be evaluated taking into consideration the nature of the seller’s economic activity and the buyer’s intentions. If a corporation is involved in real estate development activities, the sale of real property including tenants cannot be treated as losing rights to a business establishment: for developers, real property does not constitute a separate part of their business, but rather is an inventory item intended for sale.

According to the GFD, situations that can be considered as losing rights to a business establishment include, for example, when a corporation owning several items of real estate in the Czech Republic (as a real estate investor) transfers real property including lease contracts and these contracts do not cease to exist during the transfer. At the same time, the buyer obtains a suitable structure of assets sufficient to continue in the seller’s original economic activity and does not terminate this activity after the acquisition. 

To assess whether a transaction involves the loss of rights to a business establishment, it is also necessary to examine whether the transfer involves a set of components sufficient to enable the buyer to further perform the original economic activity. Without further consideration, the mere sale of real property including related lease contracts can thus not be treated as losing the rights to a business establishment for the purposes of the VAT Act. 

If you are planning to sell real property in the near future, please do not hesitate to contact us. We will be happy to help you choose the most suitable option for you.

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