The Danish Customs and Tax Agency has changed the practice regarding the determination of the purchase price in connection with a tax-free transfer of business when the seller and the buyer use the VAT system.
Succession
If a company is sold in whole or in part, the transfer of assets and inventories must be made free of VAT if the new owner is engaged in a taxable business. The new holder enters the VAT status of the seller.
Past practice
It follows from a 1978 ruling that a car dealer who took over a stock of used cars in the process of buying a business could choose between using its own purchase price as the purchase price or the seller's purchase price.
In cases where the acquisition price is higher than the seller's purchase price, the buyer could advantageously choose to use the acquisition price when calculating VAT on a subsequent sale.
Although the seller's purchase price will usually be higher as used cars decrease in value, situations may arise where used cars are sold on at a higher price. That could be the case, for example, if the price of new cars rises, as car exporters have just predicted.
New practices
With effect from 1 October 2001 onwards, business owners applying the second-hand VAT scheme to goods acquired as part of a transfer of business shall use the seller's purchase price in connection with his purchase of the second-hand goods.
In other words, there is no longer freedom of choice.
Effect of succession
1. VAT on transfer of business
Selling Price
DKK 1,200,000
Purchase price
DKK 1,000,000
Avance
DKK 200,000
Moms
kr. 0
In the event of a transfer of business, VAT shall not be calculated. Instead, the buyer must use the original purchase price, i.e. DKK 1,000,000 as the purchase price.
2. VAT on resale
Selling Price (Buyer's)
DKK 1,500,000
Purchase price (seller's)
DKK 1,000,000
Avance
DKK 500,000
VAT 25%
DKK 125,000
According to previous practice, the buyer could choose to use his own purchase price for resale, even if he had succeeded and no VAT was calculated on the purchase, as referred to in point 1.
3. VAT on resale following past practice
Selling Price
DKK 1,500,000
Purchase Price (Buyer's)
DKK 1,200,000
Avance
DKK 300,000
VAT 25%
DKK 75,000
As can be seen from the examples above, the total VAT is DKK 125,000 if the buyer uses the seller's purchase price when reselling after succession. If, despite the succession, the buyer uses his own purchase price, the VAT is DKK 75,000. That is, a difference of DKK 50,000, which the Treasury is missing.
Our rating
The previous practice was hardly consistent with the VAT Act or the VAT Directive.
A natural understanding of the rules of succession must lead to the buyer succeeding in the seller's purchase price.
Disclaimer
The above information is for guidance purposes only, and we accept no responsibility for decisions made based on this information without prior individual advice. We accept no responsibility for errors or omissions.
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