The unit, which shares little or no overlap with the manufacturer's other divisions, will change its legal structure to prepare its access to capital markets, VW said in a separate statement.
The management shake-up signals VW's desire to move forward from the emissions scandal and revive its financial fortunes.
Volkswagen Group, the world's largest automaker by sales volume, has appointed a new CEO to replace the executive who helped steer the company out of its diesel emissions scandal and into a new era of investment in electric cars.
Such an overhaul would be part of a wider auto industry trend towards spin-offs as companies aim to become more nimble and efficient to cope with rapid changes such as the rise of electric vehicles and autonomous driving.
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Gururaja Poojary picked up silver for India, missing two attempts before a successful last lift that relegated Sri Lanka's Chaturanga Lakmal into third spot.
But Diess, a lanky, cool-headed Bavarian, never got ruffled and ultimately secured a landmark deal that paved the way to cut as many as 30,000 jobs and save 3.7 billion euros ($4.6 billion).
Mueller, a former chief executive of sportscar-building VW subsidiary Porsche AG, was brought in to replace Martin Winterkorn in 2015 and was contracted to serve until 2020.
"Diess is a man of action, he is the most plausible choice at VW to lead the group into the next phase of its transformation", said Nord LB analyst Frank Schwope, who has a buy rating on Volkswagen. But instead of being squeezed out, he has been pushed upward, and has been made CEO.
One of the sources said that Blessing will be replaced by Gunnar Kilian, a general secretary at VW's works council who worked directly under labour boss Bernd Osterloh. Audi, the VW brand, the trucks division, and the group's Chinese operations also have representatives on Volkswagen's top executive body.
On Tuesday, Mueller indicated his "basic willingness to play a part" in possible changes in the firm's leadership after a VW press release announced that the company was mulling changes within its top management echelons.