Court of Justice: processing goods changes their VAT treatment

Where goods are processed in the customer's member state before being delivered, there is no intra-Community supply but a transfer of own goods followed by a domestic supply.

Introduction

In a notable judgment of 2 October 2014 the Court of Justice clarified the VAT treatment of goods traded within the EU. Fonderie (C-446/13) turns on whether processing products in another member state before they are delivered to the customer calls for a different treatment from sending goods directly to that customer.

The heart of the case

The case concerned metal parts sent from Italy to France. In France those parts were first processed and then supplied to the end customer, also in France. The crucial question was whether that intermediate step affected the VAT treatment.

The Court held that there is a difference between goods first processed in another member state and goods sent directly to the end customer in that same member state. Where the goods are sent without processing, the supplier makes an intra-Community supply to which the zero rate applies, and the customer declares an intra-Community acquisition.

Where the goods are first processed in the customer's member state and only then delivered, the intra-Community transport is decoupled from the supply. There is then first a transfer of the supplier's own goods, so that the supplier must itself declare an intra-Community acquisition in the member state of processing. That requires a local registration.

The sale itself counts as a domestic supply. Whether the supplier must charge local VAT on it, or whether a local reverse charge applies, depends on the rules in that member state.

The Court's reasoning

The contract between supplier and customer is crucial. It sets out the condition the goods must be in when delivered to the customer. That condition is only reached after processing, so the question is where the goods were located, in the context of the supply, at that moment. Because the finished goods were already in France, there is a domestic supply and not a direct intra-Community supply.

Conclusion

The judgment underlines the importance of the specific VAT rules within the EU. Where a product is first processed in another member state before reaching the end customer, the treatment differs from direct dispatch. Suppliers therefore face registration obligations and must check, member state by member state, whether local VAT must be charged on the sale.