The Spanish Tax Agency (Agencia Estatal de Administración Tributaria, AEAT) and VAT regulations contemplate the concept of a “productive unit” or “autonomous economic unit” to refer to a set of tangible and/or intangible assets that, by themselves, are suitable to carry out an independent economic activity.
The main legal basis is found in:
- Law 37/1992, of December 28, on Value Added Tax (LIVA), specifically in its article 7.1, letter a).
- Legislative Royal Decree 1/1993, of September 24, which approves the revised text of the Law on Transfer Tax and Stamp Duty (ITP and AJD), establishing the taxation rules for property transfers.
According to article 7.1 of the LIVA, the following are not subject to Value Added Tax:
“The transfer of all or an autonomous part of a business or professional estate, made in favor of a single purchaser, provided that such part constitutes, or may constitute, an autonomous economic unit capable of carrying out a business or professional activity by its own means…”
In this regard, the TEAR Murcia Resolution dated June 1, 2020 (No. 30/04722/2017) is illustrative when analyzing when the transfer of assets constitutes the transfer of a productive unit. For a “productive unit” to exist, it is necessary that the set of transferred elements allows the continuity of the activity without the purchaser needing to make substantial additional investments or integrate other essential elements to exploit the business; in any case, this assessment can be quite ambiguous.
Elements to consider to determine a “productive unit”
- Personnel, contracts, and licenses: The existence of personnel or the transfer of employment contracts and operating licenses often indicates that the transferred set is suitable to function autonomously.
- Tangible assets: Machinery, premises, inventory, etc., that facilitate production or service provision without needing to acquire other essential goods.
- Intangible assets: Patents, trademarks, licenses, client portfolios, know-how, etc.
- Continuity of the activity: The purchaser can continue the economic operation with the transferred assets, maintaining their operability.
Case law and administrative doctrine have required that the “autonomous economic unit” constitute an asset block capable of operating by itself in the activity it had been performing or a similar one. Otherwise, the sale of isolated assets would be considered subject to VAT.
VAT treatment: non-subjection and special cases
General non-subjection regime (article 7.1.a) of the VAT Law)
As established in article 7.1.a) of Law 37/1992 (LIVA), when the operation consists of the transfer of all or an autonomous part of the business or professional estate (being this an autonomous economic unit), such transfer is not subject to VAT.
Consequences of non-subjection
- Being non-subject, VAT is not accrued on the operation.
- The transferor does not charge VAT to the purchaser.
- Normally, the possibility of taxation under Transfer Tax (ITP) should be analyzed, which will be detailed later.
Exceptions: waiver of exemption and real estate operations
- Waiver of exemption: The taxpayer could opt, in certain cases, to waive the exemption (or non-subjection) if by doing so they could deduct or compensate VAT paid. However, this mechanism is more frequent when exempt real estate transfers occur and the waiver is exercised to subject them to VAT.
- Isolated real estate operations: If it is not considered that the property and other elements form a productive unit, the transfer of real estate will be subject to VAT (when the transferor is a VAT taxpayer and other requirements are met).
It is therefore crucial to determine whether we are dealing with an isolated sale of real estate (or certain isolated assets) or a genuine transfer of a productive unit. If the requirements for non-subjection are not met, the operation will be taxed under VAT in its usual manner.
Effects on Transfer Tax of non-subjection to VAT (Art. 7.5 TRLITPAJD)
In accordance with article 7.5 of Legislative Royal Decree 1/1993, of September 24, which approves the revised text of the Transfer Tax and Stamp Duty Law (ITP and AJD), “real estate” included in the transfer of a business estate not subject to VAT will be subject to Transfer Tax and Stamp Duty, in its onerous Transfer Tax modality (TPO).
The revised text of the ITP and AJD Law regulates, in its article 7.5, the subjection to TPO of certain operations not subject or exempt from VAT. Specifically, the second part of that provision states: “Also subject will be the transfers of those properties that are included in the transfer of the entirety of a business estate, when under the concurrent circumstances the transfer of this estate is not subject to Value Added Tax.”
Therefore:
- When the entirety of a business estate is transferred and such transfer is not subject to VAT (art. 7.1.a LIVA), the real estate forming part of that estate will be taxed under TPO.
- This prevents them from being “outside” the tax scope.
And what happens with the rest of the non-real estate goods and rights?
Although article 7.5 TRLITPAJD expressly refers to real estate, administrative practice understands that the so-called “closing rule” of Transfer Tax also extends taxation to the set of goods and rights transferred in the same operation, provided there is no other specific rule or exemption. This would include:
- Movable goods (machinery, furniture).
- Intangible rights (industrial property, client portfolios, licenses).
This exception will not apply when the operation is a business restructuring subject to the modality of Corporate Operations, for example in cases of mergers or spin-offs. However, if a running business constituting an autonomous economic unit is transferred, such transfer will not be subject to VAT under article 7.1 of the LIVA, but will be subject to TPO as long as real estate is included in the sale.
Practical issues and administrative doctrine
Distinction between isolated asset transfer and transfer of a productive unit
The dividing line between a VAT-subject transfer and a non-subject one lies in whether the sold assets constitute a unit capable of exploitation by itself. The TEAR Murcia Resolution dated June 1, 2020 (No. 30/04722/2017), for example, analyzed the case of transferring certain real estate assets related to an activity and concluded that there was no autonomous productive unit, only isolated asset elements.
Importance of continuity of activity
Binding rulings from the Directorate General of Taxes (DGT) reiterate the necessity that the purchaser can continue operation without requiring essential additional contributions. For example, if contracts, client portfolios, and inventory are transferred, it is generally understood that there is a clear economic unit capable of generating income by itself.
Documentation in the deed of sale
Article 7.1 of the LIVA requires that the transfer of the productive unit be reflected in a public document (usually a notarial deed) and that the part of the transferred estate be specified. The deed must precisely detail the goods and rights that make up the productive unit.
Conclusions
1- Concept of productive unit
- It must be a set of goods and rights (tangible and intangible) that allow the purchaser to continue the activity without needing to make major additional investments or incorporate essential elements not transferred.
- The key element is continuity of the activity by its own means.
2- VAT: non-subjection or subjection
- Non-subjection to VAT (art. 7.1.a LIVA) if the entirety or autonomous part of the business/professional estate is transferred to a single purchaser, constituting an autonomous economic unit.
- If it is not configured as a productive unit (sale of real estate or other isolated goods), then the operation will be considered subject to VAT, except for specific exemptions.
3- Transfer Tax: when it applies
- If the sale of the productive unit is not subject to VAT (due to “non-subjection”) and no real estate is included in the unit, the operation does not incur Transfer Tax according to the revised text of the ITP and AJD (R.D.Leg. 1/1993).
- If not, the tax rate varies depending on the Autonomous Community and the nature of the assets transferred.
4- Relevant resolutions and rulings
- TEAR Murcia Resolution of June 1, 2020 (No. 30/04722/2017), analyzing the existence or not of a productive unit.
- Binding rulings from the DGT reiterating the importance of the functional autonomy of the transferred elements.
5- Practical recommendation
- Before formalizing the sale, it is advisable to prepare a detailed inventory of assets (tangible and intangible), assess the continuity of activity, and reflect this in the public deed.
- Also, verify the regional Transfer Tax regulations, if its settlement is applicable.
If you have any questions, do not hesitate to contact us by writing to contacto@metricson.com. We look forward to talking with you!
Article written by:
Lawyer – Tax Specialist and M&A
jose.perezfuster@metricson.com
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