VAT consequences of sale-and-lease-back during the pandemic

Analysis

VAT consequences of sale and lease back during the pandemic

Deloitte Real Estate - Fundamentals of sale-and-lease-back

As a result of the stagnating economy due to the COVID-19 pandemic, an increasing number of companies are experiencing liquidity problems. Investors in real estate could increase their liquidity position by selling business assets and lease them back ("sale-and-lease-back"), thereby generating an immediate cashflow. European and national case law recently emphasized VAT consequences of sale-and-lease-back transactions.

Authors: Kevin van Lierop and Maud Verscheijden

This article is the first of a trilogy discussing VAT consequences of sale-and-lease-back under COVID-19 circumstances. Click the download button to read the full report.

Core fundamentals of sale and lease back

The two different components of sale-and-lease-back

A sale-and-lease-back consists of two different components: the sale and supply of the business asset by the seller to the buyer and the subsequent lease from the buyer to the seller. When the business asset concerns immovable property, as is presumed in this context, it is also possible to work with rights in rem (e.g. leasehold). The latter has very specific VAT consequences that go beyond the scope of this article.

Distinct and independent for VAT purposes?

For VAT purposes, each taxable supply is to be regarded as distinct and independent, unless two or more supplies are so closely linked that they objectively constitute a single indivisible supply from an economic point of view, the division of which would be artificial. Therefore, the starting point is that the supply and leaseback are separate for VAT purposes, and the VAT treatment should be based on their own merits.

European and national case law

In both European and national case law, the possibility is left open that under certain circumstances there is no supply and leaseback, but that the VAT relevant supply consists of providing financing to the seller whereby the immovable property is, presumably, transferred to the buyer as a form of collateral. This leads to other VAT consequences as a result of the transaction.

The question arises as to whether a sale-and-lease-back can qualify as a so-called transfer of a going concern, meaning no VAT is triggered by the transaction. In that case, the buyer substitutes the seller regarding the VAT position of the immovable property. But what about other important consequences that should be considered by buyers and sellers?

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