VAT-Free Spin-Off: Supreme Court Confirms Asset Transfer to a Legal Successor Is Not a Supply

Business restructuring through a spin-off is one of the most common tools owners use: to separate a line of business, prepare part of the business for sale, divide assets among partners, or move a risky segment into a separate legal entity. And almost always, the same concern arises: will the tax authorities view the transfer of property to the newly created company as an ordinary supply—and assess VAT on the full value of the transferred assets?

A ruling by the Administrative Cassation Court within the Supreme Court dated 14 липня 2026 року (case №520/1628/25) resolves this concern, relying on consistent judicial practice developed over many years. Let's break down what the court confirmed, the conditions under which this applies, and where risks still remain.

What the Court Decided

The essence of the conclusion is simple and fundamental for business: the transfer of assets—inventory, fixed assets, cash, accounts receivable and payable, and other assets and liabilities—from a reorganizing company to a newly created legal successor during a spin-off is not an object of VAT taxation.

The court's logic is based on the definition of what constitutes a VAT object. According to paragraph 185.1 of the Tax Code, transactions involving the supply of goods and services are subject to VAT. However, the transfer of property under a distribution balance sheet during a spin-off is not a supply. It is not a sale, a gratuitous transfer in a commercial sense, or a barter: it is a technical transfer of a portion of property, rights, and obligations to a legal successor within a reorganization, as decided by the owners. If there is no supply, there is no object of taxation.

The court explicitly stated that operations involving the transfer of fixed assets, inventory, cash, and accounts receivable and payable under a distribution balance sheet during the formation of a new enterprise through a spin-off cannot be considered supply operations within the meaning of tax legislation.

This Isn't New, But a Confirmation of Established Practice—and That's Why It's Valuable

The most important thing about this decision is not that it's new, but that it is not new. The court referred to a whole line of its own previous rulings that have said the same thing for years: in cases №822/2434/16 (2021), №640/1845/19 (2020), №817/76/17 (2021), №810/4427/18 (2023), №320/6091/24 (2025), and №160/29715/23 (2025).

For a business owner, this has practical significance. A single court decision is a precedent that can theoretically be challenged or circumvented. But an established practice of the Supreme Court, confirmed six consecutive times over five years, is a settled legal position that can be relied upon when planning a restructuring with a high degree of predictability. The risk of the court suddenly reversing this position is minimal.

Why This Is Also Confirmed at the Tax Code Level

Judicial practice here does not contradict the law but clarifies it. The Tax Code itself contains the logic that exempts reorganization from VAT:

• Sub-paragraph 196.1.7 of the Tax Code of Ukraine (PKU) directly states that operations related to the reorganization of legal entities are not an object of VAT taxation.
• Paragraph 184.7 of the PKU separately exempts reorganizations (including spin-offs) from the obligation to assess "conditional" tax liabilities for goods and assets not used in taxable operations. In other words, during a spin-off, the reorganizing company does not assess VAT liabilities and does not reduce its previously formed VAT credit for the transferred assets.

In other words, the legislator deliberately does not consider reorganization a transaction that creates added value. The court is merely consistently defending this logic against the controlling authority's attempts to interpret the asset transfer as a hidden supply.

The Key Condition: Proper Documentation

And here is the most important point for practice. The VAT exemption is not automatic just because you call the transaction a "spin-off." It only works if the spin-off is real and properly documented. The court paid special attention to this.

In the case under review, the reality of the transaction was confirmed by the fact that the reorganizing company notified its creditors of the planned spin-off procedure—in particular, one of the creditors was notified by letter and gave its consent to the transfer of debt.

What this means for a business owner in practice is a list of documents without which the VAT exemption is at risk:

• Owners' resolution (of the general meeting) on the spin-off.
• Distribution balance sheet (rozpodilchyi balans)—this document specifically, not a transfer deed: for spin-offs and divisions, the law requires a distribution balance sheet, whereas a transfer deed (peredavalnyi akt) is prepared for mergers, acquisitions, and transformations.
• Acceptance-transfer acts for specific assets.
• Shipping documents (TTN) for the movement of inventory and fixed assets.
• Notification of creditors about the reorganization and, where necessary, their consent to the debt transfer.
• State registration of the newly created legal successor entity and corresponding changes for the company from which the spin-off was made.

The absence or careless preparation of these documents is precisely the loophole through which the tax authorities try to reclassify a spin-off as a supply. The practical advice is simple: the documentation for the spin-off must be impeccable before filing, not assembled retroactively during an audit.

Where Risks Still Remain

While the established practice resolves the main VAT issue, a spin-off is a complex operation with associated risks that an owner should keep in mind.

An unscheduled tax audit is almost inevitable. Initiating a reorganization (except for a transformation), including a spin-off, is grounds for an unscheduled documentary audit. This means the very fact of a spin-off will likely bring auditors to your door—and this is when the quality of your documentation will be checked. You need to prepare for this in advance.

The transfer of VAT credit and a negative VAT balance is not automatic. If the legal successor wishes to have the reorganizing company's negative VAT balance transferred to it, this is done by application and, as a rule, only after confirmation by a documentary audit. Nothing is transferred "by itself."

Subsidiary liability for debts. A spin-off is not a way to "leave debts with the old company." A legal entity created as a result of a spin-off bears subsidiary liability for obligations that were not transferred to it according to the distribution balance sheet, and vice versa. An attempt to use a spin-off to evade creditor claims will not work and will create additional risks.

Special assets have separate rules. Specific restrictions apply to certain types of property and rights. For example, in the Supreme Court's practice, the transfer of a lease right for state or municipal land during a spin-off was classified as an alienation of that right, which may contradict the limitations of land legislation. In other words, there is no universal "everything is transferred without consequences"—each specific asset requires a separate review.

Risk of "high-risk" taxpayer status. Although the reorganization itself should not automatically place the legal successor on the list of high-risk VAT payers, a newly created company with no operating history often faces increased scrutiny from the monitoring system and blocked tax invoices at the beginning. It is wise to prepare a taxpayer data table (Tablytsia danykh platnyka) and evidence of real business activity from the start.

What a Business Owner Should Take Away from This

If we boil it all down to a few points:

1. Asset transfers during a spin-off are not subject to VAT—this is a confirmed, established position of the Supreme Court, not a one-off exception.
2. This exemption is conditional on reality and documentation: owners' resolution, a distribution balance sheet, transfer acts, shipping documents, and creditor notifications. Without them, the protection vanishes.
3. A spin-off almost always triggers an unscheduled audit—you should prepare for it as a planned event, not a surprise.
4. A spin-off does not absolve you of debts and does not work as a universal optimization tool—it has its own associated risks.

Restructuring through a spin-off is a powerful and completely legal tool. But its effectiveness depends entirely on the quality of legal and tax support. The difference between "a spin-off with no tax consequences" and "a VAT assessment on the entire value of assets plus penalties" lies in the quality of documents and the consistency of actions, not luck.

Conclusion

The Supreme Court ruling of 14 липня 2026 року is good news for owners planning a restructuring: the state, through its judiciary, has once again confirmed that a spin-off is not a hidden sale and does not create a VAT object. But this news is addressed specifically to those who do a spin-off correctly—with a full set of documents, real economic substance, and readiness for an audit. For those hoping to "just transfer assets" without proper documentation, the same ruling reads as a warning: the court protects a real spin-off, not an imitation of one.

Planning a restructuring or a spin-off? The lawyers and tax experts at KCPRB will manage the transaction from start to finish: we'll build a secure structure, prepare the distribution balance sheet and a full package of documents, and guide you through an unscheduled audit without any tax assessments. [Schedule a meeting with an expert →]

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This material is for analytical and informational purposes and does not constitute individual legal or tax advice. The qualification of a specific transaction depends on its circumstances; decisions should be made based on the current version of the law and with professional guidance. The referenced judicial practice: ruling of the ASC of the SC dated 14.07.2026 in case №520/1628/25 and related decisions.