Business donation to family members in the context of goods and services tax

According to Article 6(1) Act on 11 March 2004 on tax on goods and services[1] (Next the VAT Act), its provisions shall not apply to disposal transactions of an undertaking or an organised part of an undertaking.

However, the tax on several occasions in the explanations of that regulation points out that, in view of its particular nature, it should be interpreted strictly and applied only as regards disposal, in the case of any activity in which the right to dispose of goods as the owner takes place.

The divestment of the company takes place when all its assets are transferred to the ownership of the buyer who continues the business of the seller.

Therefore, with the donation of the shares in the assets of the company an important element in the assessment of whether the VAT exemption will occur will be the implementation (continuation) of the economic tasks of potential buyers.

1. Introduction

The Core Issued 20 June 2020 by the Director of National Tax Information of an individual tax interpretation[2] was the question whether the company's owner planned to donate his assets to the benefit of two the daughters will be subject to tax on goods and services.

The author of the application is an active VAT taxable person and her economic activity concerns rental and management of own or leased properties. The company consists of, among others, buildings, land, know-how, business secrets, rental contracts, furniture, electronic equipment, telecommunications, software.

The owner will give, in the form of a donation, together with her husband, the entire enterprise to two daughters who will receive a share of the one half, and will not leave any assets to the company immediately after this donation.

The applicant informed that the daughters run their own company in the form of an open company (which is also an active VAT taxable person) and would, after donating, include the company they received in their own company and continue to operate.

Only for a short period of time will the number of owners of the company change, but after the import it will again be exclusive property one entity, i.e. companies.

2. Transfer of the company to joint ownership

According to the owner’s position in the application, the donation in question – in the light of Article 6(1) the VAT Act – should not be taxed on VAT.

The applicant recalled that according to Article 551 Act on 23 April 1964 Civil Code[3] ((c) the undertaking is an organized set of intangible and tangible assets intended to carry out business activities, including ownership of immovable property or movable property, rights arising from leases and leases of immovable property or movable property, and rights to use immovable property or movable property resulting from other legal relations, business secrets.

In this state, the owner of all assets will change, but “their business substance (being, functions and interconnectedness) will not change.

The transmitted mass will be capable of continuing its business and will indeed be used." The applicant also referred to the judgment of the WSA in Białystok of 2 October 2019[4], according to which ‘the organisational and functional nature of the company creates an independent economic entity capable of operating on unchanged terms, despite its divestment’.

The joint ownership will be transferred to the company according to Article 552 k.c.5. According to the author of the proposal, the disposal transaction is also a donation, including in fractional parts, and since it is subject to all material components and intangible enterprises, it is a company in the light of Article 6(1) the VAT Act

3. Continuation of the business of the donor company

The Director of National Tax Information found the applicant’s position incorrect and recalled that according to Article 5(1) the VAT Act VAT is subject, inter alia, to the payment of goods and services in the territory of the country, and according to Article 7(1) the VAT Act This supply means the transfer of the right to dispose of goods as the owner, and Article 7(2) the VAT Act provides that this supply is also a free transfer by the taxable person of goods belonging to his undertaking, and in particular: 1) the transfer or use of goods for personal purposes of the taxable person or his employees, including former employees, shareholders, shareholders, members of cooperatives and their household members, members of the bodies constituting legal persons, members of the association, 2) any other donations.

He also pointed out that ‘the concept of ‘disposal transaction’ should be understood as ‘supply of goods’ in terms of Article 7(1) the VAT Act, i.e. that “disposal” includes any activity in which the right to dispose of goods is transferred, such as the owner, e.g.

sale, replacement, donation, transfer of property in the form of a non-monetary contribution.”

The Director of KIS stressed that the continuation of activities by the purchaser is a condition for non-taxing the divestiture of the company and recalled that according to Article 195 k.c. ownership of the same thing may be indivisible to several persons (share ownership), and according to Article 196(1) k.c.

co-ownership is either co-ownership in fractional parts or joint ownership.

The tax authority pointed out that none of the purchasers will carry out economic activities using the assets of the donated company – only the entity will do so third, that is, the public company which they create daughters and to which they intend to transfer the shares received.

He also pointed out that the transfer of co-ownership to his daughters would result in a 1/2 share ‘there is no delivery to a single entity, e.g. the VAT taxable person of the whole undertaking.’

The director of KIS also explained that each of the daughters would actually receive only a part of this company (a fraction) rather than its entirety.

He therefore considered that ‘the subject matter of the free transfer would not be an undertaking within the meaning of Article 551 k.c., but a donation of shares in its individual components.

This is due to the fact that the participation does not have a physical characteristic, self-reliance, it is a fraction of the ownership right, attributable to each component of the company.

A separate fraction (in each of these components) does not make it possible to carry out economic tasks independently." In its interpretation conclusions, the Director of KIS also stated that the donation of fractional parts of the company should be treated as a supply of goods according to Article 7(1) Act which falls within the scope of the tax on goods and services

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1 i.e. Journal of Laws of 2020, item 106. 2. Reference no. 0112-KDIL1-2.4012.141.2020.3.PM. 3 i.e. Journal of Laws of 2019, item 1145. 4 reference no. I SA/Bk 320/19. 5 Article 552 k.c.: ‘The legal activity to which the undertaking is subject shall include all that is part of the undertaking, unless otherwise derived from the content of the legal act or from specific provisions’.