CJEU Confirms the Right to Deduct VAT on the Acquisition of a Fixed Asset Made Available Under Tooling

On October 4, 2024, the Court of Justice of the European Union (CJEU) delivered a judgment in the Voestalpine Giesserei Linz case (C-475/23), addressing the right to deduct VAT related to the acquisition of a machine provided free of charge to a subcontractor under a tooling agreement.

The judgment pertains to a common practice, especially in the automotive industry, where a taxpayer makes a fixed asset available (such as a machine, technical device, or mold) free of charge to a subcontractor, who is then obligated to provide services—such as contract manufacturing—on their behalf. This arrangement ensures the quality of the produced goods and compliance with applicable standards.

The CJEU confirmed that when fixed assets are made available free of charge under tooling, the taxpayer can deduct VAT, provided the assets are used by the contracting party only to the extent necessary for the taxpayer’s taxable transactions. This ruling confirms that the established business model, particularly in the automotive sector, is correct and does not result in negative VAT consequences.

Problem with the VAT deduction

The case concerned the Austrian company Voestalpine Giesserei Linz GmbH (VGL), which provided a crane purchased in Romania to its subcontractor Global Energy Products S.A. (GEP). The crane was necessary for the technological process resulting in the manufacture of cast products that were sold by VGL. Although VGL was not directly engaged in manufacturing activities, the crane was used exclusively in connection with its taxable activities (through its use by GEP to manufacture the products necessary for those activities).

The tax authorities in Romania denied VGL the right to deduct VAT, arguing that the purchased goods were used by a subcontractor (GEP) and not directly by VGL. They argued that the purchase was not related to the taxable activity of the taxpayer itself.

CJEU: right to deduct exists

The CJEU confirmed that the acquisition of fixed assets, such as an overhead crane, provided free of charge under a tooling contract to a subcontractor, grants the right to deduct VAT. The CJEU emphasized that for VAT deduction to apply, the fixed assets must be used strictly for the purposes of the provider’s taxable business activities and only to the extent necessary for those transactions.

In the case of VGL, the overhead crane was essential for the processing of cast products, and its provision to the subcontractor was merely a means for VGL to carry out its subsequent taxable transactions (the sale of finished products manufactured in the production process using the overhead crane provided to the subcontractor), which justified the VAT deduction.

It can be inferred from the CJEU ruling that the exclusivity of the goods’ use is crucial. The goods provided to the subcontractor under a tooling arrangement must be used solely for the provider’s taxable activities and cannot be used for other purposes or by other customers of the subcontractor. We therefore recommend that the exclusivity of such use always be stipulated in subcontracts.

Importance of compliance with formal obligations

In the second part of the judgment, the CJEU addressed the issue of compliance with record-keeping obligations. The Romanian tax authorities had denied VGL the right to deduct VAT on the grounds that it had not maintained detailed accounts for its activities in Romania. The CJEU ruled that such a lack of record-keeping cannot result in a denial of VAT deduction if the tax authority has all the necessary information to confirm that the substantive conditions for the deduction are met.

In particular, the CJEU emphasized that imposing the sanction of refusing a VAT deduction due to formal deficiencies (such as failure to comply with accounting and reporting obligations) clearly exceeds what is necessary to ensure the proper application of those obligations.

Conclusions

The CJEU judgment in the Voestalpine case is particularly significant for entrepreneurs who outsource the production of goods under their brand to subcontractors by providing machinery, equipment, and/or molds for free use under tooling agreements. The Court confirmed that the acquisition of fixed assets made available free of charge as part of tooling entitles the provider to deduct VAT, provided the assets are necessary for the provider’s taxable activities and the substantive conditions for VAT deduction are met.

Moreover, formal deficiencies cannot automatically result in the denial of the right to deduct VAT. This judgment reaffirms the established practices of manufacturing companies, particularly in the automotive and processing industries.

Our support

If you have any questions regarding VAT accounting on the purchase of tooling machines, please feel free to contact us. With our extensive experience in tax consultancy, particularly in contract manufacturing and tooling agreements, we are well-equipped to offer you comprehensive support in this area.