Can a business transfer qualify for VAT relief when it is split between family members and then merged into an existing partnership? Court of Justice of the European Union (ECJ) Case T‑366/25 addresses this question, arising from a dispute in Poland between individual entrepreneur D.B. and the Polish Tax Authority. At issue is the VAT treatment of D.B.'s plan to donate her business in equal shares to her two daughters, who would then contribute those shares to their general partnership.
Background of the Case
D.B. operates a business called undertaking B. She planned to donate the entire business to her two daughters, A.K. and P.K., who would each receive a 50% share. D.B. planned to transfer all assets belonging to the business and would immediately stop carrying on the business.
Notably, the daughters already operate another business, P., as a general partnership. After receiving undertaking B., they intend to incorporate its assets and activities into that partnership and continue the business in essentially the same way as before.
D.B. therefore asked the Polish Tax Authority whether the donation could qualify for the VAT exemption applicable to the transfer of an undertaking. The Tax Authority concluded that it could not. It considered that the transaction would not constitute a transfer of an undertaking for VAT purposes under Polish VAT Law.
The Tax Authority's main reasoning was that A.K. and P.K. would each receive only a 50% co-ownership interest in individual assets, not an undertaking capable of carrying on an economic activity independently. Since each daughter would own a specific share of the assets, the Tax Authority viewed the transaction as the transfer of shares in individual assets rather than the transfer of the business as a whole.
The Tax Authority also considered that the daughters themselves would not actually use the transferred assets to conduct the business. Instead, the assets would subsequently be contributed to their existing general partnership, P., which would continue the economic activity. Accordingly, in the Tax Authority's view, the economic activity would be carried on by the partnership rather than by A.K. and P.K. personally.
D.B. challenged the ruling before the Provincial Administrative Court, which rejected the appeal and agreed with the Tax Authority. It held that the donation was not a VAT-exempt transfer of an undertaking because D.B. was effectively transferring shares in individual assets rather than the undertaking itself or an organized part of it. The Provincial Court also emphasised that the economic activity would ultimately be carried out by a separate entity, the general partnership owned by A.K. and P.K.
As a result, D.B. appealed to Poland’s Supreme Administrative Court, arguing that the Provincial Court had wrongly characterised the transaction as a donation of individual assets rather than a donation of the undertaking. In her view, the Provincial Court should have considered the daughters’ clear intention to continue the business in essentially the same form after receiving it. She argued that this intention was relevant to determining whether the transaction qualified as a transfer of an undertaking under Polish and EU VAT rules.
Due to uncertainty about how to interpret Article 19 of the EU VAT Directive, the Supreme Administrative Court paused the proceeding and asked the ECJ for a preliminary ruling.
Main Questions from Request for Ruling
The Supreme Administrative Court asked the ECJ whether Article 19 can apply where a taxable person donates an entire business by giving 50% shares to two individuals who are not taxable persons, and those individuals immediately contribute their shares to a general partnership in which they are partners.
Applicable EU VAT Directive Article
Regarding the EU VAT Directive, the ECJ outlined Articles 2(1) and 19 as the most relevant ones. Article 2(1) establishes the general rule that the supply of goods for consideration by a taxable person acting as such is subject to VAT when the supply takes place within an EU country. Article 19 provides a specific rule for the transfer of a totality of assets or part of a business. It covers transfers made for consideration, without consideration, or as a contribution to a company.
Poland National VAT Rules
The ECJ identified two provisions of the Polish Law on VAT as most relevant. Article 2(27e) defines an organised part of an undertaking, and Article 6(1) provides that VAT does not apply to the disposal of an undertaking or an organised part of one.
Importance of the Case for Taxable Persons
The case is important for taxable persons involved in business transfers, restructurings, or succession planning, particularly where a business is transferred to multiple recipients or through several legal steps. It highlights the need to assess whether the assets transferred constitute an autonomous economic unit capable of supporting an independent economic activity, rather than simply a collection of asset shares. Taxable persons should also carefully consider the structure, timing and intended use of transferred assets when determining the applicable VAT treatment.
Analysis of the Court's Findings
Before analyzing the question and interpreting the relevant national and EU-wide provisions, the ECJ addressed the admissibility question raised by the European Commission. More specifically, the Commission pointed out that D.B. transferred the business to her daughters without consideration, as a donation. Given that such a transaction would not normally be subject to VAT, the Commission argued that the referring court had not clearly explained why VAT could apply in the first place. It therefore suggested that the question might be hypothetical.
The ECJ denied the concern, stating that the fact that the donation was made without consideration did not make the preliminary question irrelevant, because the Article 19 classification could determine whether the transaction falls within the special VAT treatment for transfers of undertakings.
The ECJ further clarified that VAT normally applies to each transaction in the production and distribution chain, with businesses able to deduct VAT incurred on their costs. Article 19 creates an exception to that general approach.
Where an EU country has chosen to apply it, a transfer of an entire business or part of a business, whether for consideration, free of charge, or as a contribution to a company, may be treated as if no supply of goods had taken place. The recipient is instead treated as the successor to the transferor. Consequently, such a transfer does not constitute a taxable supply of goods under Article 2 of the VAT Directive.
From that perspective, the key question is not simply whether the individual legal steps involve transfers of assets. First, it is necessary to determine whether D.B.'s donation of the business to her daughters and the daughters' immediate contribution of their shares to their partnership should be viewed as a single transaction. Once that question is settled, it is possible to assess whether the transaction as a whole qualifies as the transfer of a totality of assets or part thereof under Article 19.
The ECJ explained that, as a general rule, each transaction must be treated as separate and independent for VAT purposes. This means that the donation of the business to the daughters and their subsequent contribution of the shares to the partnership would normally be examined as two distinct transactions.
However, an important exception exists. The established case law, including the Határ Diszkont case, states that where several transactions are formally separate but are so closely connected that they objectively form one indivisible economic transaction, they must be treated as a single transaction for VAT purposes.
Nonetheless, the ECJ noted that the Polish court must determine whether the transactions are genuinely connected in this way. The ECJ guided the interpretation of the EU VAT rules, but the national court must apply those principles to the facts of the case.
In that regard, the ECJ examined the actual structure of the transactions and noted that each daughter would receive a 50% share of undertaking B. The daughters become separate legal owners of their respective shares and can independently decide what to do with them, including whether to contribute them to their jointly owned general partnership. Notably, they are not legally required to carry out the second transaction. This means they could choose not to transfer their shares to the partnership, and the second transaction is not a condition for the first donation to take place.
Based on these facts, the ECJ indicated that, subject to the Polish court's final verification, the two stages are not sufficiently connected to constitute one single, indivisible economic transaction. As a result, it considered that the transactions should normally be treated separately. What's more, the ECJ determined that there are effectively four transactions:
- D.B. transfers a 50% share in undertaking B. to A.K.
- D.B. transfers a 50% share in undertaking B. to P.K.
- A.K. subsequently transfers her share to the general partnership.
- P.K. separately transfers her share to the same partnership.
The ECJ then explained the purpose of Article 19. By design, Article 19 makes the transfer of businesses easier by avoiding a situation where the recipient has to pay a large amount of VAT upfront. To qualify, the transfer must satisfy two requirements. First, the assets transferred must together constitute a business or an independent part of a business capable of carrying on an independent economic activity. Second, the transferee must intend to continue operating the business or part of it.
The ECJ added that, for the first requirement to be satisfied, the assets transferred must, taken together, be sufficient to enable the recipient to carry on an independent economic activity. It also noted that, in his Opinion concerning EU VAT TOGC relief rules for business gifts, Advocate General Martín y Pérez de Nanclares stated that each daughter's receipt is a separate and independent transaction, so the test must be applied to each daughter individually.
This ultimately leads to the final question of whether the particular 50% share received by A.K. is sufficient, by itself, to allow her to carry on undertaking B.’s economic activity independently, and the same question must separately be asked in relation to P.K.
Court's Final Decision
In the end, the ECJ held that the transfer of a 50% share of undertaking B. to each daughter does not, subject to verification by the Polish court, qualify as a transfer of a totality of assets or part thereof under Article 19. The decisive factor is that neither daughter individually received an autonomous business unit capable of carrying on an independent economic activity.
Conclusion
The ruling underscores that business owners and tax advisors should proceed with caution when structuring family succession plans or multi-step restructurings. To benefit from Article 19, each recipient must acquire an autonomous, functioning economic unit capable of operating independently. Fragmenting an undertaking into fractional shares, even as an intermediate step before pooling the assets in a joint entity, risks disqualifying the transfer from relief.
