Reviewing business transactions as a whole
We often hear discussions about certain complex transactions and whether to treat these as a whole or whether it is more appropriate to split them into several parts. Recently, a similar case reached the Supreme Administrative Court. Although in that case there was a presumption or non-recognition of VAT deduction by the buyer, the conclusions can certainly be generalised to the example of income tax. The situation in this case concerned the conclusion of several contracts, which the tax administrator assessed as a single commercial transaction or sale of a business enterprise. Since the VAT Act does not consider the sale of a business enterprise as a taxable item, the tax deduction was not recognised for the purchaser, who claimed a VAT deduction on just one purchase contract for machinery. However, the tax authority included this purchase contract in the transaction as a whole, i.e. only under the sale of the business enterprise. The buyer was not helped by the argument that the seller had duly declared and paid the VAT.
As I pointed out in the introduction, this case concerned VAT, but attention should also be paid to the pitfalls of other taxes. The Income Tax Act will also treat a transparent sale of a business enterprise quite differently from a situation where the transaction is diluted into multiple contractual arrangements. Caution should therefore be exercised, and clients would do well to consult similar major transactions involving sets of assets and rights with their lawyers.