Is the local sale of tooling ancillary to an EU supply of parts?

Who this will interest: businesses in the automotive sector.

Key point(s): the sale of tooling should not be seen as ancillary to the sale of parts manufactured with the said tooling.

Essentia’s take: Businesses in the automotive sector have been treating supplies such as the ones described above as separate transactions. The decision in this case clarifies this is the correct VAT treatment and the correct interpretation of the principles behind it.

This decision brings welcomed clarity and ensures that Tax Authorities can no longer pursue this line of thought when challenging such transactions.

Action points: Businesses in the automotive sector should review their sales contracts for tooling to ensure the provisions of the agreements are clear and there is no ambiguity around whether the supply of tooling is linked to a different transaction or concerning. More generally we recommend ensuring all transactions are well documented in order to minimise the chances of being challenged.

The case in detail

Brose Prievidza, spol. s r.o (“Brose Prievidza”). is a Slovakian established and VAT registered business  specialised in the manufacturing of window regulators and door systems for the automative industry.

Brose Prievidza acquired goods from a Bulgarian supplier, Integrated Micro-Electronics Bulgaria’ EOOD (“IME Bulgaria”) with the goods being shipped from Bulgaria to Slovakia. This sale was treated as an intra-community supply of goods subject to zero rating in Bulgaria.

The goods sold to Brose Prievidza were manufactured using bespoke tooling equipment that had been created by IME Bulgaria and sold to Brose Fahrzeugteile SE & Co. KG (“Brose Coburg”). Brose Coburg was part of the same group of companies as  Brose Prievidza.

IME Bulgaria had invoiced Brose Coburg for the sale of the tooling and the tooling remained at IME Bulgaria’s manufacturing facility and used to produce goods for the Brose group, including for Brose Prievidza.

At a later point Brose Coburg decided to sell the tooling to Brose Prievidza with the goods continuing to be used by IME Bulgaria to manufacture goods for the Brose group in Bulgaria. Bulgarian VAT was charged on the sale and Brose Prievidza applied for a refund under the EU VAT Refund Directive with the Bulgarian Tax Authorities.

The refund claim was rejected however on the grounds that VAT should not have been charged as the sale of the tooling was ancillary to the intra-community supply of goods from Bulgaria to Slovakia and the two transactions had been artificially split.

The case was referred to the CJEU.

Some context around the issue at hand

It is customary in the automotive industry for tooling equipment to be bespoke to each customer’s need. As such, a manufacturer will usually engage with their customer for the production of the tooling, which is then sold to the customer but remains on the manufacturer’s premises. The tooling will be used exclusively to manufacture parts for that specific customer.

The customer that ordered the tooling to be manufactured may sell it onwards to another business in the corporate group, usually due to commercial considerations. For example, the party ordering the tooling may be the head office of a group of companies which has a global manufacturing contract or a contract with an end customer while the party buying the parts from the manufacturer may be a different subsidiary that later assembles them and sells them to the head office. Selling the tooling therefore usually makes commercial sense.

This arrangement usually leads to VAT registrations and local VAT being charged by one party to another. The tax authorities (especially in Eastern Europe but increasingly in Western Europe as well) have been known to challenge these transactions and either try to assess VAT on the sale (where no VAT had been charged) or reject VAT recovery for the buyer (where VAT had been charged).

In the case at hand the Bulgarian Tax Authorities believed the sale of the tooling by Brose Coburg to Brose Prievidza  had been artificially split from the supply of goods manufactured using the tooling. This is an unusual view since the sale of the tooling and the sale of the goods manufactured with the said tooling are supplies made by different businesses. Furthermore, the goods had never left Bulgaria, therefore applying a zero rate in this case would be unusual.

Decision of the Court

The Court ruled that the supply of the tooling does not qualify as a zero rated intra-Community supply of goods. Therefore Brose Prievidza  should be entitled to a refund (assuming the other conditions for a refund were also met.

The reasoning of the court was based on the opinion of the Advocate General (a specialist sometimes called upon by the Court to assist in complex cases) who stated and can be summarised as follows:

• as a matter of principle each transaction should be regarded as a distinct and independent transaction. Even if the transactions serve a common purpose and an economic link between them exists, that will not automatically mean that those supplies must be regarded as constituting a single transaction for VAT purposes.
• A single supply can exist where two or more elements or acts supplied by the taxable person to the customer are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split
• in order for a cross border supply of goods within the EU to be zero rated the goods physically have to move, which was not the case here as the goods remained in Bulgaria.
• As an exception to the above, one supply may take place if the two supplies had been artificially separated in order to gain a VAT advantage. However, the documentation and information provided to the CJEU did not have any information suggesting the transaction had been artificially split.

In light of the above the Court decided the sale of the tooling was a separate supply from the sale of the goods manufactured with the tooling. As such, the tax payer had applied the correct VAT treatment and the Bulgarian Tax Authorities should have not denied the refund.

Main Takeaway

The main takeaway from this decision is that not all transactions that serve a common purpose and have an economic link are necessarily ancillary to one another or form a single supply. Simply because the tooling was used to manufacture goods does not mean the sale of the tooling should be ancillary to the sale of the goods manufactured with the tooling.

What does it mean to businesses

Businesses in the automotive sector have been treating supplies such as the ones described above as separate transactions. The decision in this case clarifies this is the correct VAT treatment and the correct interpretation of the principles behind it.

This decision brings welcomed clarity and ensures that Tax Authorities can no longer pursue this line of thought when challenging such transactions.

However, Tax Authorities will continue to pursue ways to challenge transactions in the automotive sector. One area of risk is whether leaving the tooling free of charge with the manufacturer for the production. This issue has been already raised with the CJEU in a referral sent this month (case T-680/25 Mercedes Benz) where the Romanian Tax Authorities argue that such a transaction should be a taxable supply subject to VAT.

We therefore recommend businesses in the automotive sector to review their sales contracts for tooling and ensure the provisions of the agreements are clear and there is no ambiguity around whether the supply of tooling is linked to a different transaction or concerning. More generally we recommend ensuring all transactions are well documented in order to minimise the chances of being challenged.

If you would like to speak to us on the above or more generally about VAT on transactions in the automotive sector feel free to contact us.