TOGCs, VAT and composite transactions

The General Court has held that a composite transaction under which a person transfers their business to a partnership, via separate transfers of 50% of that business to two individuals who then contribute their shares to that partnership, does not qualify as a TOGC for VAT purposes: Szytelbiecka v Dyrektor Krajowej Informacji Skarbowej (Case T-366/25). The Court held that each of the two donations to the individuals had to be analysed as a separate and independent transaction, and that a 50% share of the business could not, on its own, constitute an autonomous economic unit capable of being operated independently, so the conditions for TOGC relief were not met.

Background

In this case, a person who carried on a taxable business wanted to transfer that business to her two daughters to continue carrying it on in partnership. It was proposed that 50% of the business be transferred to each daughter who would then contribute their share into a partnership which would carry on the business. A VAT ruling was sought from the Polish tax authorities that this would qualify as a TOGC, but the tax authority took the view that since each daughter would only receive part of the business (and each part could not be separately carried on) the conditions for a TOGC were not met. In addition, the tax authority noted that the business would not ultimately be carried on by the daughters themselves but a third party, the partnership.

The taxpayer appealed that ruling and the local Polish court referred the question to the General Court for a preliminary ruling.

The AG opined that the transactions in this case would not qualify as a TOGC. Firstly, the language of Article 19 of the Principal VAT Directive refers to "transferor" and "person to whom the goods are transferred" both in the singular. From this, the AG concluded that the TOGC provisions are not intended to apply where there is a supply by a number of transferors or where there is a supply to a number of transferees. The AG also considered whether it might be possible to adopt a "joint analysis" of the transactions on the basis that to view them as a composite might be more natural and more consistent with the economic reality. However, whilst noting that this would be a possible approach, the AG concluded that the VAT rules should be applied to each element of the transaction separately.

The Court's decision

In contrast to the AG’s approach, the Court itself has approached the decision by way of a single/multiple supply analysis.

The Court noted that the concept of a "transfer of a totality of assets" under Article 19 covers a transfer where two cumulative conditions are met: first, the assets transferred must together constitute a business or part of a business capable of carrying on an independent economic activity; and second, the transferee must intend to operate that business rather than merely liquidate it immediately. These conditions are assessed separately in respect of each transferee where there is more than one.

Rather than adopting the AG's textual "singular transferor/transferee" argument, the Court applied its ordinary case law on single/multiple supplies under which each transaction is normally to be regarded as distinct and independent. Formally separate transactions form a single supply only where they are so closely linked that they constitute, objectively, a single indivisible economic supply which it would be artificial to split. On the facts, each daughter would receive a half share of which she was sole owner and could dispose of without the other's consent, and the subsequent contribution to the partnership was not conditional on, or dependent on, the initial gift and occurred at a later date. The Court therefore found, subject to verification by the referring court, that the two donations were not so closely linked as to form a single indivisible transaction.

Assessed separately, each daughter's transaction failed the first condition: a half share of the business did not constitute an autonomous unit of assets enabling her, on her own, to carry on an independent economic activity, irrespective of her intention to contribute that share to the partnership. The Court accordingly ruled that the transfer of an undertaking to two individuals in equal half shares, who intend to make an immediate contribution in kind of those shares to a partnership, does not constitute a transfer of a totality of assets or part thereof within the meaning of Article 19.

Comment

The CJEU has in the past used the concept of economic reality to apply the VAT system to formally separate transactions as a composite whole. For example, in Mydibel SA v Belgium (Case C-201/18) the Court held that a sale and leaseback transaction may be regarded as a single transaction for the purposes of determining whether a person has disposed of property in the context of the operation of the capital goods scheme. In Szytelbiecka, however, the Court did not engage directly with the AG's discussion of "economic reality", instead resolving the case by applying its established single/multiple supply case law to conclude that the gift to each daughter and the later contribution to the partnership were separate and independent transactions.

It may be worth noting that the assumption in this case appears to be that the partnership was a separate legal entity from the two individuals. Different jurisdictions may take different approaches to the status of partnerships and it may be that the transfer to the two individuals to carry on the business in partnership might automatically result in (essentially) the transfer of the business directly into partnership, avoiding the intermediate steps in this case.