Austrian case law: Asset deal constitutes a new lease agreement for VAT purposes
The Austrian Supreme Administrative Court (VwGH) has decided that in the event of an asset deal (e.g. sale of a building) with singular succession (rights transferred individually), a new lease agreement is created for VAT purposes. In practice, this means that after the sale, a lease of business premises that is subject to VAT is only possible if the tenant almost exclusively generates taxable supplies on which input VAT can be deducted.
The lease of premises for business purposes is VAT-exempt, with the exemption being linked to the loss of input VAT deduction for the tenant. The taxable person can, however, opt for VAT in order to ensure his right to deduct input VAT. Whether using this option makes sense needs to be decided on a case-by-case basis and, since the 1st Austrian Stability Act 2012 (1. StabG 2012), has been subject to the significant limitation that the option of tax is only possible if the tenant uses the leased premises almost exclusively for purposes which allow input VAT to be deducted (Sec. 6 para 2 UStG in the version of 1. StabG 2012). Section 6 para 2 UStG in the version of 1. StabG 2012 is applicable to all lease agreements which commenced after 31 August 2012 (“new lease agreements”).
Input VAT cannot be deducted on a tax-exempt lease and adjustments must be made (on a pro-rata basis) for input VAT that was claimed in the past.
When does a new lease agreement exist?
The VwGH has previously ruled (VwGH 3.4.2019, Ro 2018/15/0012) that no new tenancy exists in the case of mergers with universal succession (all rights and obligations transferred to universal successor) and the landlord’s option to tax will thus remain independent of the revenues generated by the tenant.
However, according to a recent VwGH decision, an asset deal with singular succession should be seen differently. In this case, even if the lease agreements are compulsorily transferred in accordance with Sec. 1120 Austrian Civil Code (ABGB), a new lease agreement is created for VAT purposes (VwGH of 20.10.2021, Ra 2019/13/0084).
WB GmbH acquired a plot of land with a leased building, of which a small portion was leased to a tenant who primarily generated VAT-exempt revenues. The subsequent dispute concerned whether the acquirer was permitted to claim full deduction of input VAT. While this was recognised by the Austrian Federal Tax Court (BFG) with reference to a VwGH decision from the year 2019, the VwGH confirmed the existence of a new lease agreement.
The VwGH substantiated this decision on the basis that the entry-into-force provision of Sec. 6 para 2 Austrian VAT Act (UStG) in Sec. 28 para 38 subpara 1 UStG relates to the “beginning of the lease agreement” and not to the conclusion of a contract under civil law; the purpose of the provision is merely “avoidance of hardship”. However, the acquirer makes the decision in knowledge of the consequences. Therefore, the assumption of a new lease agreement for VAT purposes, which leads to the application of para 6 Sec 2 UStG in the version of 1. StabG 2012 does not constitute a hardship that has to be avoided. In this regard, the VwGH refers in its justification to an Austrian Supreme Court of Justice (OGH) decision in a case which addressed a potential claim for compensation of a landlord in relation to a tenant in the amount of the additional input VAT expenses, where the claim was denied (OGH 20.10.2020, 1 Ob 165/20a).
The decision has no impact on residential rentals, which are always subject to VAT.
Unlike the decision of 2019 regarding mergers with universal succession, it seems to be irrelevant whether the original lease agreement is continued or not in transactions with singular succession. It also appears to be irrelevant that existing lease agreements are compulsorily transferred when a leased property is transferred by means of an asset deal.
From a practical point of view, greater attention will need to be paid in future to the VAT consequences arising from transactions or reorganisations involving real estate. For larger projects, the potential effects (input VAT adjustments due to a compulsory VAT-exempt lease following sale) should be checked in advance and potentially also quantified. This is especially the case as a claim for compensation in the amount of the additional input tax expenses of the landlord (buyer) in relation to the tenant under Sec. 30 UStG has already been turned down by the OGH.