VAT on Tool Supplies: ECJ Ruling Provides Clarity

Typical Scenarios Involving Tool Supplies in Production

Many companies have tools, models, or molds manufactured to their specifications for the production of specific goods. These tools often remain with the manufacturer, who uses them to produce the ordered goods. In most cases, invoicing is separate as the provision of the tool and the subsequent supply of goods are treated independently from both a legal and economic perspective. For VAT purposes, however, the key question is whether the supply of tools constitutes an independent service or an ancillary service to the supply of goods produced using those tools. The latter would mean that the tool supply shares the VAT treatment of the goods supply. This is particularly relevant in an international context, where the supply of goods is often VAT-exempt.

The ECJ Ruling at a Glance

In case C-234/24, the ECJ addressed exactly this issue. The Bulgarian tax authorities had argued that the supply of a tool that remains with the manufacturer and is used exclusively to produce goods for the customer constituted an ancillary service to an intra-Community supply of goods and was therefore also VAT-exempt. The ECJ disagreed and held that:

• As a rule, each supply must be considered a separate and independent service. An exception only applies where a supply has been artificially split or where a supply qualifies as an ancillary service to a principal service. In this case, the Court saw no evidence of such circumstances, as the acquisition of the tool served its own economic purpose.
• An intra-Community supply that is exempt from VAT exists only if the tool is actually transported to another EU Member State.

This ruling reinforces the tax independence of tool supplies and clearly distinguishes them from supplies of goods. Only in exceptional cases will the requirements for classifying such supplies as ancillary services be met.

Position of the German Tax Authorities

The German tax authorities set out their position on the supply of tools in a BMF letter dated November 27, 1975 (Section 3.10 (6) No. 17 UStAE). According to this guidance, the sale of tools and molds is only considered an independent service if the purchaser intends to use the items for their own economic purposes. This particularly applies where the purchaser also intends to make the molds, models, or tools available to other businesses for the production of goods. If, however, the purchaser’s sole intention in acquiring the molds, models, or tools is to prevent the supplier from using them to produce goods for other customers, the supply is treated as an ancillary service.

The ECJ ruling does not confirm these criteria. It therefore remains to be seen to what extent the German tax authorities will adjust their guidance to align with the Court’s interpretation.

Impact on Day-to-Day Practice

In our experience, cases of this kind have already been resolved in line with the ECJ ruling, despite the existing BMF guidance. Nevertheless, companies that have assumed (or intentionally structured) a VAT-exempt supply of tools based on the BMF letter - often to avoid a costly input VAT refund process in Germany - should carefully assess the implications of this ruling. Our experts are, of course, available to support you in reviewing and adapting relevant contractual arrangements.