Lending equipment free of charge is not a deemed supply

Mercedes-Benz AG (Mercedes-Benz) is a car manufacturer established in Germany and has a Romanian VAT registration for its Romanian production activities. Mercedes-Benz has outsourced part of its car parts manufacturing to Romanian subcontractors (the subcontractors). 

To minimise financial risks and keep control over the production equipment, Mercedes-Benz purchased moulds and equipment (the equipment) from various equipment suppliers outside of Romania, which it subsequently made available free of charge to its subcontractors. In at least one case, the subcontractor supplied and invoiced the parts it produced to the equipment supplier, which subsequently supplied the parts to Mercedes-Benz.

Romanian legislation rules out a deemed supply insofar as the subcontractor uses the equipment provided free of charge exclusively to supply goods or services to the owner of the equipment. The Romanian tax authorities interpreted this as requiring a direct invoicing relationship between the subcontractor and Mercedes-Benz as owner of the equipment. 

The question is whether the free of charge provision of equipment by Mercedes-Benz to its subcontractors constitutes a deemed VAT supply by Mercedes-Benz, and to what extent it is relevant that there is no direct invoicing relationship between Mercedes-Benz and its subcontractor.

Business purpose

The General Court reiterates that providing goods free of charge does not in itself amount to a deemed supply of services in the sense of Article 26 EU VAT Directive. That is the case only where the provision serves purposes other than those of the taxable person's business. A business purpose is one that serves the functioning and profitability of the taxable person, or more generally one that is pursued in the interest of the undertaking.

Following the General Court, tooling and equipment are generally an important part of the car manufacturing process. The equipment is used to make parts that are fitted into the cars Mercedes-Benz produces, so Mercedes-Benz has a direct interest in those parts being made to its exact specifications. This is further supported by the fact that Mercedes-Benz acquired the equipment and made it available to reduce production risk, and that it remains the owner of the equipment.

Exclusive use of the equipment

The referring court must establish whether the provision of the equipment actually benefited Mercedes-Benz's economic activity. In particular, it must verify whether only Mercedes-Benz used the parts made with the equipment. If so, providing the equipment to the subcontractor is not a deemed supply of services.

Invoicing relationship

The General Court further considers that for determining whether the equipment has been used for non-business purposes, it is not decisive whether Mercedes Benz as the car manufacturer and the subcontractor have an invoicing relationship. A different explanation under national Romanian law makes no difference, given that the EU VAT Directive must be applied uniformly across the Member States.

The Mercedes-Benz AG case is relevant for all parties that rely on subcontractors (e.g. toll or contract manufacturers) and provide them with equipment free of charge for use in their production or logistics processes. It is also relevant for parties with alternative supply chains, in which the subcontractor does not invoice or supply the goods produced directly to the principal.

In this regard, the Mercedes-Benz case clarifies that the mere provision of goods free of charge does not result in a deemed supply. However, the business purpose of the provision must be demonstrated. That business purpose may be broken if the goods or services provided free of charge are not used exclusively for the business benefit of the owner thereof. Businesses should therefore be able to demonstrate the business purpose in their current set-up. If other parties besides the manufacturer also benefit, a deemed supply could arise on which VAT could be due. In most cases, this VAT is irrecoverable.

Furthermore, the judgment clarifies that the invoicing flow between the subcontractor and the manufacturer is not decisive in determining whether the free-of-charge provision has a business purpose. Alternative supply chains therefore do not in themselves break the business purpose, and the General Court's ruling does not seem to require businesses to reroute their invoicing flows.