The transfer of immovable property that is situated in Malta is considered to be a supply which is exempt from Maltese VAT.
However, the Maltese VAT Act (‘VATA’) also provides that in specific circumstances, “the transfer by a person of assets of his economic activity shall be treated as neither a supply of goods nor a supply”. This is referred to in the VATA as a Transfer of a Going Concern (‘TOGC’).
There are specific and cumulative conditions that should be satisfied when applying the TOGC provision. However, to the extent that those conditions are satisfied, then the transfer of the assets in question should not be considered to be a supply of goods or services for VAT purposes - and the transaction should, consequently fall outside the scope of VAT. However the use of the TOGC provision, wherein that transfer also includes immovable property, may give rise to other, more complex considerations.
The complication does not arise from the application of the TOGC provision itself, but may arise when determining the wider implications of the said transfer in light of the Value Added Tax (Adjustments Relating to Input Tax on Capital Goods) Regulations (the 'Regulations').
In terms of the Regulations, a taxable person is required to adjust the input tax previously claimed (or not claimed in certain circumstances) should one of a number of certain and specific events take place within the adjustment period contemplated within the Regulations and which alter the extent of the said taxable person’s right to recover input tax.
By way of an example, a taxable person may claim input tax on expenses that are incurred and directly attributable to the development of immovable property that is or will be utilised to provide taxable supplies. However, if the activities of the taxable person change, and the immovable property is transferred (being a supply that does not give rise to the right to recover input tax), then such an event may give rise to a requirement to adjust the input tax originally claimed if such event were to fall within the adjustment period set out in the Regulations.
However, to the extent that the transfer of the immovable property satisfies all the relevant TOGC conditions, then the said transaction should not be considered to be a supply of a good or service for VAT purposes and consequently may result in a situation were no adjustment to the input tax previously claimed would be required in terms of the Regulations.
However, what would the implication be if (following the transfer) the person acquiring the property were to alter its activities and start to use the immovable property for the purpose of providing supplies that do not give rise to the right to recover input tax?
Should the obligation to adjust the initial input tax claimed lie with:
the transferor, as the entity that made the initial deduction of input tax; or
the transferee, on the basis that the change that gave rise to an adjustment in terms of the Regulations took place after the property was acquired?
Some guidance on these questions may be sought from a decision by the Courts of Justice of the European Union (CJEU) in the Pactor Vastgoed BV Case (Case C-622/11) even though the case dealt with the application of Dutch VAT provisions to the facts of the case.
In particular, the CJEU stated that although the EU VAT Directive (2006/112/EC) did not prescribe which taxpayer would be liable for the repayment of input tax in situations that give rise to such an adjustment to the input tax originally claimed, it nonetheless provides an exhaustive list of instances where the liability for the said repayment of input tax could be transferred to another person. The circumstance at hand in the case, which are similar in principle to the circumstances presented in the example above, was not contemplated in this list.
Therefore, while in terms of Pactor Vastgoed BV Case it appears that the VAT authorities may not seek to recover any of the input tax initially recovered from a taxable person other than the person who originally claimed the input tax deduction, it is not immediately clear what obligations, if any, are placed on the transferor in such instances.
In light of the above, it is important that all parties concerned in similar transactions (i.e. a TOGC wherein subsequent adjustments in terms of the Regulations are required) are aware of such uncertainties and, to the extent possible, seek to implement measures that may clarify the VAT exposure of the respective parties.
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