New ruling regarding transfer of going concern

When applying the VAT exemption for transfer of a going concern, the general approach has up until now been that the exemption can be applied if the purchaser has an equal or higher right to deduct VAT compared to the seller. The better view is that such cases have not been considered to affect or distort the competition. This view has also been reflected in the Swedish Tax Agency’s earlier public statements.

The recent ruling concerned an insurance company, engaged in VAT-exempt activities, that intended to transfer all its assets, including intangible assets, to a subsidiary also conducting VAT-exempt business. 

Since the subsidiary had no right to deduct input VAT, the Council for Advance Tax Rulings did not consider the transfer to qualify as a VAT-exempt transfer of a going concern under the Swedish VAT Act. Both the Swedish Tax Agency as well as the insurance company considered this to be in conflict with the EU VAT Directive.

The Court did not share the parties' view, stating that the recipient may gain a competitive advantage compared to other operators performing the same type of VAT-exempt business but acquiring assets in other ways than through a transfer of a going concern. The Court argued that such operators are required to pay VAT on their acquisitions and pass that cost on to their customers.

Based on this, the Court ruled that it is justified to prevent competitive distortion, and therefore consistent with the EU VAT Directive, to limit the VAT exemption of a going concern to cases where the recipient has a right to deduct input VAT. 

The Court's ruling changes the previous general approach that the VAT exemption for transfer of a going concern should be applied when the purchaser has an equal right to deduct VAT compared to the seller, and introduces a stricter application of the exemption in Sweden. Although the ruling will have a significant effect on restructurings and transactions within VAT exempt sectors, it is not clear how it will affect transfers of a going concern to a purchaser with limited VAT deduction rights. 

The Tax Agency has announced that, the relevant public statements regarding transfer of a going concern are currently under review, and that the Tax Agency will update its position on the matter.