Is VAT payable on the sale of an enterprise or part of one?

An enterprise sale is not a taxable supply

Under Section 10(1) of the VAT Act, the following are not treated as a supply of goods or services:

• the sale of an enterprise or a part forming an independent organisational unit;
• the contribution of an enterprise or such a part as a contribution in kind to a company or cooperative;

provided that the acquirer is a VAT payer or becomes one under Section 4(1)(d) of the Act.

An enterprise sale is therefore not invoiced with VAT. That is deliberate: the transaction should not burden the buyer with tax on assets it will continue using for business.

The transfer must genuinely concern an enterprise or a part forming an independent organisational unit, rather than an arbitrarily assembled package of assets. If only a collection of assets is transferred, it is an ordinary supply of goods with all the resulting tax consequences. This distinction is one of the first matters we address in an asset deal.

When VAT is payable after all

Section 10(2) contains an exception: the rule does not apply if the acquirer exclusively or predominantly supplies goods and services exempt from VAT under Sections 28 to 41 of the Act.

However, this exception does not apply where the seller itself also exclusively or predominantly makes such exempt supplies.

In practice, if the buyer operates in insurance, financial services, healthcare or residential letting, for example, its supply profile must be checked before structuring the transaction without VAT.

The same applies to a partial division

Under Section 10(3), the transmission of tangible or intangible assets to a successor company in a partial division or cross-border partial division is likewise not treated as a supply of goods or services if the successor company is a VAT payer or becomes one.

Here too, the successor company is treated as the legal successor in respect of the assets passing to it.

The buyer succeeds to the burdens as well as the benefits

The Act is clear: for VAT Act purposes, the acquirer is treated as the legal successor of the taxable person that sold or contributed the enterprise, to the extent of the tangible and intangible assets transferred.

Succession therefore concerns more than rights. Obligations also pass, including the duty to continue adjusting VAT deducted on capital goods under Section 54b(1).

The provision that makes a tax schedule essential

This is the part to remember in transaction practice.

Under Section 54b(2), the seller of an enterprise, and likewise a company that has undergone a partial division, must inform the acquirer of the VAT relating to acquired capital goods under Section 54(2), the VAT deducted and the adjustments made to that deduction.

The crucial provision is Section 54b(3):

If the acquirer of an enterprise or part of an enterprise, or the VAT payer to whom another VAT payer’s capital goods have passed in a partial division or cross-border partial division, does not have the information under paragraph 2 available, it is presumed that VAT deduction on acquiring the capital goods was claimed in the year in which the legal successor acquired those goods, at 100% of the taxable amount, which is the fair value of those capital goods.

(unofficial English translation)

If the buyer does not receive the information, the Act therefore presumes a full deduction based on the assets’ fair value in the year of acquisition. In practical terms, the buyer’s VAT adjustment period starts again in the least favourable form, with a risk of having to repay VAT it never deducted if the use later changes or the assets are sold in an exempt transaction.

This is a legal presumption, rather than a penalty. It cannot be rebutted by saying ‘the seller did not give us the information’.

The enterprise sale agreement therefore needs a schedule containing capital goods information and VAT deduction adjustments, together with the seller’s obligation to deliver it at closing, supported by a representation and a holdback. An agreement that fails to address this transfers a risk to the buyer that the buyer cannot even quantify.

Further consequences for the buyer

• A taxable person within the scope of Section 4(1) becomes a VAT payer on the date it acquires the enterprise of a VAT payer, or a part of it forming an independent organisational unit, if it acquires assets in Slovakia (Section 4(1)(d)). This is not an automatic consequence of every acquisition of any enterprise; where the seller or acquirer has a different status, the applicable registration regime must be determined separately.
• If the seller is dissolved without liquidation and its legal successor is or becomes a VAT payer, no tax liability on the assets arises in the final tax period of the kind that would otherwise arise on deregistration. This is one tangible difference between a merger and liquidation.

Where we handle this

We prepare the choice between a sale of an ownership interest and an enterprise sale, the transaction structure and the agreement’s tax schedule through company sales and purchases. We map target risks in legal due diligence and handle corporate transformations through mergers and acquisitions.

We are lawyers, rather than tax advisers. We structure the agreement and its schedules to ensure you actually receive the seller’s tax information; calculating the specific tax is a tax adviser’s task.