In Brose Prievidza (C-234/24), the Court of Justice shed light on precisely this situation. The Court confirmed that a supply can, in principle, only be exempt as an intra-Community supply when the goods are actually and physically transferred to another Member State. The judgment further suggests that the supply of tooling generally constitutes an independent transaction with its own economic purpose. Such a transaction cannot simply be absorbed into the exempt supply of the components produced with that tooling.
Facts
A Slovak company, Brose Prievidza, manufactures automotive
parts. For that production process, specific tooling was produced by IME
Bulgaria, an independent manufacturer established in Bulgaria. The tooling
remained in Bulgaria, at IME’s premises, and was used exclusively for the
production of parts intended for Brose Prievidza.
The order for the tooling, however, was placed through the
German group company Brose Coburg, which centralises the purchase of production
tooling within the Brose group. IME Bulgaria invoiced the tooling to Brose
Coburg with Bulgarian VAT, since the equipment was located in Bulgaria. Brose
Coburg then resold the same tooling to Brose Prievidza, again charging
Bulgarian VAT, without any physical movement of the goods.
Brose Prievidza subsequently applied for a refund of the
Bulgarian VAT paid, pursuant to Directive 2008/9. The Bulgarian tax authorities
refused the refund. The components produced using the tooling had been supplied
by IME Bulgaria to Brose Prievidza without VAT, as these transactions were
treated as exempt intra-Community supplies. According to the authorities, the
supply of the tooling and the supply of the components manufactured with it
constituted a single, indivisible economic transaction. They therefore
qualified the entire operation as one intra-Community supply, meaning that the
tooling was also VAT-exempt. Since exempt transactions do not give rise to a
right of refund, the application was rejected.
Preliminary question
The referring court asked whether a VAT refund can be
refused when the supply of tooling is treated as an exempt intra-Community
supply, even though the goods never left the Member State of the supplier. In
other words, can an intra-Community supply exist without any physical movement
of the goods, and can a tool that is merely functionally linked to the
production of parts be regarded as an ancillary transaction to those supplies?
Judgment
The Court based its reasoning on several clear principles.
First, it emphasised that an intra-Community supply can only be exempt if the goods actually leave the Member State of departure. Article 138 of the VAT Directive requires a physical transfer to another Member State. Where that transport is absent – as in this case, where the tool remained in Bulgaria – there is no intra-Community supply but a domestic transaction subject to Bulgarian VAT.
Second, the Court reiterated that each supply must, in
principle, be treated independently. Only where it is clear that several
operations are so closely linked that they form a single transaction, or where
one operation is merely ancillary to another with no independent purpose, may
an exception be made. The Court saw no reason to do so here.
The Bulgarian tax authorities sought to rely on the logic of
the Part Service judgment (C-425/06), arguing that the sale of the tool was an
artificial split designed to obtain a VAT refund. The supply of the tool should
therefore be considered ancillary to the intra-Community supplies of parts made
by IME Bulgaria, meaning no VAT should have been charged and no refund could be
claimed.
The Court rejected this reasoning. Unlike in Part Service,
there was no abuse or artificial arrangement. The separation between the supply
of the tool and that of the parts was based on genuine economic reasons. IME
Bulgaria supplied the parts, while Brose Coburg sold the tooling – two distinct
contracts, each serving its own function within the production process. The
Court also noted that Brose deliberately centralised tooling procurement
through Brose Coburg, since at the time of ordering it was not yet clear which
subsidiary would carry out the production. This was, in the Court’s view, a
legitimate and practical business decision, not an artificial split.
The fact that the tool was necessary for manufacturing the
parts did not alter that assessment. Functional interdependence alone is
insufficient to merge supplies for VAT purposes. The tool was used for serial
production, had a longer useful life and its own economic significance. For
Brose Prievidza, ownership of the tool provided tangible advantages: greater
control over production, reduced dependence on the supplier and the ability to
transfer the tool internally. This pointed to an independent business purpose.
The Court’s conclusion is unequivocal: Article 4(b) of
Directive 2008/9 does not allow the refusal of a VAT refund for a supply that
involves no cross-border movement, unless that supply is genuinely part of a
single economic transaction or truly ancillary to a transaction that does
involve an intra-Community supply. That was not the case here.
Commentary
The judgment serves as a reminder of a common misconception
in practice: the fact that VAT is charged on a genuine transaction does not
automatically make that VAT deductible or refundable. Where VAT is invoiced on
a transaction that is, in substance, exempt, that VAT remains non-deductible,
even if correctly charged and paid.
In Brose Prievidza, this tension became clear. The Bulgarian
administration refused the refund of VAT on tooling that had remained in
Bulgaria, arguing that this supply should be treated as ancillary to the exempt
intra-Community supply of parts. The Court disagreed. As long as the goods are
not physically moved to another Member State, there is no intra-Community
supply. The sale of tooling that remains within a single Member State is
therefore a local transaction subject to VAT.
The Court also emphasised that the economic link between the
tooling and the parts produced with it is, in itself, insufficient to treat
both operations as a single supply. The transfer of ownership of tooling may,
in practice, have an independent economic purpose: it provides production
certainty, independence from the manufacturer and flexibility within the group.
This is enough to treat the supply separately for VAT purposes.
In Belgium, the sale of moulds or reproduction material that
remain in Belgium is in principle regarded as a domestic supply. The tax
administration nevertheless applies a pragmatic tolerance: when the tooling is
invoiced by the same supplier who also delivers the parts, the value of the
tooling may be included in the taxable amount of the exempt supply of the
finished goods. This avoids the need for a separate refund request. Similar
administrative practices exist in other Member States.
This pragmatic approach reduces complexity, particularly
since refund procedures can be cumbersome in some jurisdictions. However, the
judgment appears to place this flexibility under pressure. By confirming once
again that exemption requires an actual physical transfer, while also
suggesting that the supply of tooling often has an independent economic
purpose, the Court raises the question whether such administrative practices
will remain sustainable in the long term.