Physical Movement of Goods as a Sine Qua Non Condition for Intra-Community Supply: An Analysis of CJEU Case C-234/24 in the Context of Tooling Structures
The judgment of the Court of Justice of the European Union rendered on October 23, 2025, in Case C-234/24 (Brose Prievidza) constitutes a significant jurisprudential touchstone for taxpayers operating within complex production structures across the European Union. This decision resolves a fundamental question that has vexed practitioners and academics alike: whether a taxpayer may claim a VAT refund for production equipment that never physically departed the supplier’s jurisdiction, notwithstanding that such equipment serves to manufacture components subsequently delivered through intra-community supply arrangements.
The Brose Prievidza ruling illuminates the tension between formalistic territorial requirements embedded in VAT legislation and the operational realities of modern cross-border manufacturing networks. At its core, the case examines whether the absence of physical cross-border movement can be overcome by economic nexus, functional interdependence, or contractual relationships within corporate groups. The Court’s response – emphatically negative – reaffirms the primacy of objective, territorial criteria over subjective commercial considerations in determining the VAT treatment of transnational transactions.
The “Tooling Ownership” Business Model: Conceptual Framework and Commercial Variants
To properly contextualize the Brose Prievidza decision and appreciate its implications for contemporary commercial practice, one must first understand the “tooling ownership” business model that undergirds the disputed transaction structure.
Defining Tooling in Industrial Context
Tooling encompasses specialized production equipment and instrumentation, including injection molds, stamping dies, testing apparatus, and other capital assets essential to manufacturing specific components. Within the automotive industry – the sector at issue in Brose Prievidza – tooling comprises injection molds for plastic components, stamping dies for body panels, specialized assembly fixtures, quality control testing equipment, and robots or automated systems dedicated to particular production lines. The valuation of such equipment ranges from tens of thousands to millions of euros per tooling set. While the disputed equipment in Brose Prievidza carried a value of €62,000, automotive industry practice regularly involves substantially higher amounts.
Taxonomy of Tooling Ownership Models
International commercial practice has evolved four principal tooling ownership paradigms, each carrying distinct legal, tax, and business implications.
Customer Ownership Model
The customer ownership model, predominant in automotive and aerospace manufacturing, vests complete legal title in the customer immediately upon production, regardless of payment status. This arrangement represents the most robust form of proprietary protection. Under this structure, the supplier retains and utilizes the tooling as bailee for the customer. Legally, this creates a bailment relationship: the supplier possesses and operates the tooling but holds it in trust for the rightful owner. Critically, the supplier cannot assert ownership claims even absent payment.
Major original equipment manufacturers (OEMs) – including Ford, Bosch, Chrysler, and Nexteer Automotive – stipulate in their standard terms that they acquire exclusive ownership of all tooling immediately upon its production or procurement by the supplier, irrespective of payment status. This model yields several strategic advantages: it ensures production continuity in the event of supplier insolvency; facilitates supplier transition with minimal disruption through tooling transfer; protects against supplier disputes or hold-up situations; ensures quality control over production standards; and provides enhanced bargaining leverage in long-term commercial relationships.
Ownership agreements typically incorporate detailed provisions mandating physical marking and permanent labeling of all tooling with customer identification, photographic documentation of tooling identification, comprehensive tooling inventories delivered to the customer, and restrictions prohibiting use for other customers or competitors.
Supplier Ownership Model
The supplier ownership model, less prevalent in international manufacturing, vests title in the supplier, who retains and maintains the tooling throughout the production period and thereafter. This arrangement typically applies when industry practice dictates that the supplier maintains and replaces worn tooling – for instance, forging dies or extrusion equipment – or when the customer prefers to avoid upfront capital investment in tooling. Because the supplier absorbs tooling costs, these expenses are generally recovered through higher per-unit product pricing. However, the customer possesses minimal ability to ensure tooling quality, maintenance, or protection. Should the supplier face bankruptcy or engage in disputes with the customer, the customer forfeits access to production capacity entirely.
Amortized Model
The amortized model represents a hybrid approach balancing capital constraints with long-term ownership benefits. Tooling costs are distributed across production runs rather than paid upfront, with the customer ultimately acquiring ownership upon completion of all payments. Costs are typically amortized over a specified number of production units (e.g., distributed across one million parts over three years), a fixed time period (e.g., twenty-eight to thirty-six months), or milestone-based payments encompassing design, construction, and testing phases.
When suppliers finance tooling, they may embed financing charges reaching eighteen to twenty-two percent effective interest rates beyond the baseline tooling cost. Legal title transfers to the customer upon final payment; until then, the supplier technically retains a security interest in the equipment. For purchasers, this arrangement reduces upfront capital requirements, preserves cash flow, and enables accelerated production commencement. For suppliers, it ensures business volume continuity and cost recovery.
Ostensibly Free Tooling Model
The ostensibly free tooling model renders equipment nominally costless to the customer by incorporating tooling expenses into per-unit pricing. Rather than charging a separate tooling fee, the supplier embeds tooling costs within the finished product’s unit price. This structure creates several complications, including: opacity regarding actual tooling costs; potential for suppliers to claim inflated tooling values for leverage in disputes; challenging cost analysis for future production planning; limited visibility into maintenance and replacement costs; and production delays arising from tooling ownership disputes.
Legal practitioners caution that free tooling is almost never truly free; rather, costs are recovered through elevated per-part pricing, potentially throughout the product lifecycle.
Factual Matrix of Brose Prievidza
The case involved an advanced customer ownership model with on-site equipment retention, commonplace in automotive manufacturing. Brose Coburg, a German company registered for VAT purposes in both Germany and Bulgaria, purchased specialized tooling from IME Bulgaria, a Bulgarian entity. This initial transaction established Brose Coburg as the equipment’s legal owner. Critically, the tooling remained at IME Bulgaria’s production facility throughout its operational life. The equipment was never physically transported either to Brose Coburg in Germany or to Brose Prievidza in Slovakia.
Although physically located in Bulgaria, the equipment was utilized exclusively to manufacture components for Brose Prievidza, a Slovak company within the same corporate group as Brose Coburg. IME Bulgaria employees operated the equipment, but according to specifications and quality requirements prescribed by the Brose group. Components produced using this equipment were subsequently delivered directly by IME Bulgaria to Brose Prievidza through VAT-exempt intra-community supplies.
On June 7, 2021, Brose Coburg transferred tooling ownership to Brose Prievidza through a commercial transaction, issuing an invoice for €62,000 plus Bulgarian VAT, which was duly paid. Title to the equipment passed from the German to the Slovak entity, yet the equipment physically remained in Bulgaria, where IME Bulgaria continued using it to manufacture components for Brose Prievidza.
Commercial Rationale for the Structure
Why did the Brose group adopt this particular configuration? The economic reality provides a logical and compelling explanation. Brose Coburg functioned as a competence center for tooling matters across the entire Brose group. At the time of equipment procurement, the ultimate producing entity within the group remained undetermined. The selection depended upon: the geographical location of end customers (automotive manufacturers); the external tooling producer’s location (IME Bulgaria); production capacity availability across various group facilities; and operational and logistical costs.
Following the determination that Brose Prievidza would serve as the final component recipient, ownership transfer occurred. This enabled proper asset allocation in the appropriate operating entity’s balance sheet. Maintaining the tooling physically at IME Bulgaria – where it was manufactured and where technical competence for its operation resided – constituted the most operationally efficient solution. Physical relocation of multi-ton precision equipment would prove costly and risky, serving no rational business purpose.
Legal ownership of the tooling by Brose – first Coburg, then Prievidza – ensured: control over a critical supply chain element; protection against IME Bulgaria’s potential financial difficulties; capacity to transfer production to alternative suppliers if necessary; and rights to audit, inspect, and control quality. This structure therefore addressed both operational efficiency requirements and risk management imperatives within the international supply chain.
Administrative and Judicial Proceedings
On March 10, 2022, Brose Prievidza filed an application for Bulgarian VAT refund on the equipment purchase for the period from January 1 through December 31, 2021. By decision dated July 15, 2022, this application was denied. The Bulgarian tax administration contended that the disputed equipment supply should be treated as ancillary to component supplies and likewise qualify for VAT exemption as an intra-community supply. Consequently, according to the tax authority, VAT was improperly invoiced, precluding refund entitlement pursuant to Article 4(b) of Directive 2008/9.
The Sofia first-instance court dismissed Brose Prievidza’s appeal, determining that given the disputed equipment supply’s ancillary character relative to intra-community component supplies manufactured by IME Bulgaria, it should fall under the same tax regime. The court concluded that these two transactions were artificially severed. Accordingly, the equipment supply should be subject to zero rating, such that Brose Coburg should not have assessed VAT on the equipment supply invoice.
The matter ultimately reached Bulgaria’s Supreme Administrative Court, which suspended proceedings and referred a preliminary question to the Court of Justice of the European Union. This court explained that while the case circumstances might indicate some connection between the equipment supply and component supplies, it harbored doubts whether such a structure truly constituted artificial transaction splitting, particularly given the absence of demonstrated tax abuse intent and each transaction’s independent economic logic.
Opinion of Advocate General Juliane Kokott
Prior to judgment, on May 22, 2025, Advocate General Juliane Kokott presented her Opinion, which substantially influenced the Court’s subsequent decision. Kokott emphatically stated that the tooling structure involved no abuse of tax law. She emphasized that the transactional arrangement reflected genuine economic activity: the equipment was essential for production and remained operationally on-site with the manufacturer. The mere fact that the parent company initially acquired and paid for equipment before transferring it to a subsidiary does not constitute VAT abuse.
The Advocate General forcefully underscored that Article 138 of the VAT Directive requires actual physical cross-border goods transport to qualify a transaction as an exempt intra-community supply. Because the equipment remained in Bulgaria throughout, this fundamental condition was not satisfied. The exemption principle under Article 138 possesses territorial character and depends upon objective facts rather than economic interdependencies or group relationships. Without physical cross-border goods movement, intra-community supply cannot exist, regardless of how closely integrated the economic structure’s remaining elements may be.
Kokott expressly distinguished the equipment supply from supplies of parts manufactured using it. These constitute separate transactions with different execution times, consideration, and recipients. Equipment cannot be treated as a dependent or ancillary service relative to product sales but rather constitutes an independent goods supply. Although EU law permits treating multiple supplies as a single transaction under certain circumstances, Kokott observed this applies exclusively to scenarios where supplies originate from the same taxable person and form an indivisible whole from the recipient’s perspective. In the present case, equipment was supplied by Brose Coburg, while components were manufactured and supplied by IME Bulgaria – indicating different suppliers in independent transactions.
The Advocate General likewise rejected the contention that equipment supply and component supply constitute a unified complex intra-community supply. The transactions were independent, involved different suppliers, and were not presented to the customer as a collective package. Each possessed its own economic logic and rested upon separate contractual relationships.
Based upon findings that the tooling transaction failed to satisfy exemption conditions, Kokott concluded it must be treated as a taxable domestic supply in Bulgaria. Consequently, the assessed input VAT was justified and subject to refund under the refund directive. The Advocate General emphasized the significance of legal certainty and the neutrality principle in VAT law. Businesses must be able to rely upon formal and objective criteria specified in the VAT Directive. Reinterpreting supplies solely based upon functional or economic linkages would undermine these principles and expose taxpayers to retroactive liability and arbitrary treatment by Member State tax administrations.
The Court of Justice’s Judgment
The Court of Justice, sitting in its Tenth Chamber, in its judgment of October 23, 2025, fully endorsed the Advocate General’s position and ruled in favor of Brose Prievidza. The Court held that EU law precludes denying VAT refund for equipment supplied to a taxpayer established in a Member State other than the acquisition State when the equipment never physically departed the supplier’s Member State territory – unless, considering all circumstances characterizing the transactions, that supply must be regarded as forming part of a single indivisible economic supply or as ancillary to a principal supply consisting of intra-community supplies of goods manufactured using that equipment.
Fundamental VAT Principles
The Court commenced its analysis by recalling fundamental VAT law principles. According to settled case law, the VAT exemption for intra-community supply provided in Article 138 of the VAT Directive applies exclusively when three conditions are cumulatively satisfied. First, there must occur a transfer of the right to dispose of goods as owner to the purchaser. Second, the supplier must demonstrate that goods were dispatched or transported to another Member State. Third, goods must physically depart the supply Member State’s territory. The Court clearly stated that absent physical goods movement beyond the supplier Member State’s territory, supply cannot qualify as intra-community supply, even when sale occurs between entities from different Member States.
The Court further emphasized that intra-community supply corresponds to intra-community acquisition as defined in Article 20 of the VAT Directive. This provision establishes that acquisition can be regarded as intra-community only on condition that goods were transported or dispatched to another Member State for the acquirer. It follows that Article 138 application conditions cannot be satisfied if goods constituting the subject of supply to the acquirer never physically departed the supply Member State’s territory. The circumstance that goods were sold by a company established in a Member State other than the acquirer’s Member State and other than that in which these goods are physically located does not undermine this conclusion.
Analysis of Transaction Structure
In the case at issue, the disputed equipment was the subject of two sales through which the right to dispose of this equipment was first transferred from IME Bulgaria to Brose Coburg, then from that company to Brose Prievidza. However, these goods were neither transported nor dispatched to successive acquirers but remained in Bulgarian territory. Since Article 138 application conditions were not satisfied, VAT refund on this goods acquisition cannot be excluded through applying Article 4(b) of Directive 2008/9, which excludes refund exclusively for transactions exempt or potentially exempt from VAT.
Single Supply Analysis
The Court then analyzed whether the disputed equipment supply should be regarded as part of a single indivisible economic supply together with component supplies. It recalled that Article 1(2), second subparagraph, and Article 2 of the VAT Directive establish that each transaction must in principle be regarded as distinct and independent. This principle applies even when some connection exists between several supplies, considering all transactions’ economic linkage and common purpose. Consequently, even if the sole purpose of component supplies on one hand and disputed equipment on the other was fulfilling production orders for Brose Prievidza, this purpose or potential economic linkage between these supplies does not automatically mean they must be regarded as constituting a single transaction.
Nevertheless, exceptions to this principle may be warranted. A transaction comprising a single supply in economic terms should not be artificially divided, lest the VAT system’s functioning be impaired. According to settled case law, a single supply exists when at least two elements or at least two acts performed by the taxable person for the customer are so closely connected that they objectively form a single inseparable economic supply whose division would be artificial. Moreover, under certain circumstances, formally distinct supplies that may be performed separately and thus may separately be subject to taxation or exemption should be considered a single transaction when not independent from each other. This occurs particularly when at least one element must be regarded as the principal supply while other elements constitute one or more ancillary supplies treated for tax purposes like the principal supply.
Rejection of Single Supply Classification
The Court observed, however, that the circumstance that multiple identical goods supplies – in this case, components – occurred between the same companies does not suffice to conclude that these supplies, independently of the disputed equipment supply, should be regarded as a single transaction. These supplies’ subject identity does not automatically mean they constitute objectively a single indivisible economic supply whose division would be artificial. This is especially true given that two different goods supplies – in the present case, disputed equipment and components – are made by two independent service providers. From the average consumer’s perspective, separate treatment of supplies made by two independent service providers appears entirely logical.
The Court emphasized that the circumstance that some connection exists between transactions – because disputed equipment is essential for component production – does not mean they must be regarded as a single transaction and thus as indivisible supplies. However, by way of exception, two supplies made by two independent service providers may be regarded as one complex supply if artificial splitting of these supplies is established.
Distinguishing Part Service
The referring court relied upon the Court’s judgment of February 21, 2008, in Part Service to conclude that component supplies and disputed equipment supply must be regarded as constituting a single supply. The Court explained, however, that indications contained in that earlier judgment do not permit concluding that supplies such as those at issue in the main proceedings were artificially split, because none of the transaction characteristics described in Part Service is comparable to supply features in Brose Prievidza.
Unlike the situation in Part Service, where both companies making supplies to the same customer were affiliated, belonging to the same group, in Brose Prievidza each supply originates not from deliberate supply splitting by the supplier but from separate contracts concluded with two independent service providers. These supplies, considered separately, rest upon their own economic logic. Furthermore, the referring court found that neither was it alleged nor demonstrated that the company receiving various supplies – namely Brose Prievidza – sought to obtain an undue tax advantage resulting from different tax treatment of the supplies under consideration. By contrast, in Part Service the Court recalled that the element of seeking abuse plays an essential role in qualifying transactions as subject to artificial splitting.
The Court additionally noted that the circumstance that equipment is intended not for producing a single part or parts batch or for incorporation into components but for use in serial production of these parts or components may contribute to demonstrating that this equipment supply is not so closely linked to a particular parts supply as to require regarding it as forming with that specific parts supply objectively a single indivisible economic supply.
Ancillary Supply Analysis
Regarding whether equipment supply must be regarded as ancillary to component supplies, the Court recalled that according to settled case law, an ancillary supply exists when it does not constitute an end in itself for the customer but serves to enjoy the supplier’s principal supply in the best possible way. It follows that when each of these supplies has its own function or purpose for the customer, none of these supplies can be regarded as ancillary to the other.
The Court indicated that if purchasing equipment essential for manufacturing goods, which is made available to the supplier of those goods, gives the acquirer security enabling strengthening of its position vis-à-vis the supplier – particularly in case of insolvency – or allows that acquirer to transfer or relocate this equipment should the production process so require, such circumstance constitutes a clear indication that supply of said equipment constitutes an end in itself for that acquirer and consequently should not be considered ancillary to supply of parts produced using it, which has a different purpose.
Moreover, the Court stated that it may be presumed that equipment, as a tool, will be used throughout the production cycle of goods manufactured with its help, in connection with which it was made available to the manufacturer. Supply of such equipment therefore has its own purpose relative to various component supplies and consequently cannot be regarded as ancillary to those supplies.
Economic Reality as Determinative Factor
The Court acknowledged that while the circumstance that equipment constitutes a precondition for each subsequent supply of goods manufactured using it might indicate that its acquisition would constitute a means to enjoy supply of those goods under optimal conditions, this element must nevertheless be considered in all circumstances under which these transactions are made. It falls to the referring court to consider economic and commercial realities as an essential element for qualifying supply as ancillary or independent. Consideration of given transactions’ economic reality, which in principle finds reflection in parties’ contractual relationships, is regarded as a fundamental criterion for applying the common VAT system.
In this respect, the business model of the group to which some companies participating in supplies under consideration in the main proceedings belong constitutes an element that the national court should take into account. Brose Prievidza explained that the circumstance that disputed equipment was first sold by IME Bulgaria to Brose Coburg before it acquired the equipment from Brose Coburg is justified by equipment order centralization at Brose Coburg within the Brose group. At the time of ordering equipment, the group entity that must produce parts is not yet known. Selection of this entity depends particularly upon customers’ geographical location and the third-party company producing said equipment.
Such a procedure within the Brose group appears to correspond to economic and commercial realities of supply transactions under consideration in the main proceedings, reflected in successive sales contracts for disputed equipment, regarding which the referring court found they do not constitute a construction aimed at tax abuse or obtaining an undue tax advantage. Each supply, whether concerning this equipment or components, appears to correspond to a stage in the production process of manufactured parts including these components, which may justify qualifying these various supplies as independent supplies that should be taxed independently.
Invoicing as Supporting Evidence
The Court finally observed that intra-community supplies of components and disputed equipment were subject to separate invoicing. The Court has already held in essence that if case circumstances indicate the customer intends to acquire separate supplies, the transaction made must be regarded as comprising independent supplies, even if that customer paid a single price. All the more when supplies were subject to separate payment, this element – though not in itself decisive – argues for qualifying given supplies as independent supplies.
International Expert Perspectives
The Court’s judgment elicited substantial commentary from international advisory firms and VAT experts. KPMG practitioners emphasize that the ruling carries direct practical significance for enterprises in automotive, electronics, and machinery sectors, where tooling represents substantial initial investment. As these specialists observe, tooling structures constitute common practice, particularly among automotive industry suppliers. Subcontractors are commissioned to produce parts that can be manufactured only using special tools ordered from the subcontractor but remaining the customer’s property on-site for parts production.
Commentators from Alvarez & Marsal draw attention to the decision’s broader context, emphasizing that the arrangement reflects genuine economic activity because equipment is needed for production and remains operationally on-site. The intra-group decision regarding which entity’s balance sheet contains the tools constitutes a legitimate business consideration rather than evidence of tax avoidance. This perspective proves particularly salient in the context of increasingly integrated international production structures.
Tax advisors from international firms indicate the judgment’s significant financial implications. VAT on tooling may increase total production costs by up to twenty-seven percent. For a €1 million tooling investment, this translates to €270,000 in VAT – capital that might otherwise be reinvested in research and development, innovation, or production capacity expansion. Effective VAT recovery can reduce tooling costs by the aforementioned twenty-seven percent, providing manufacturers with substantial competitive advantage.
Experts uniformly emphasize the critical importance of proper documentation and transaction structuring. Recommendations encompass: reviewing contracts to clearly delineate separate supplies and establish tooling transaction independence from component production; reassessing existing tooling arrangements’ VAT treatment for compliance with the Court’s interpretation; ensuring proper documentation evidencing supply character, execution time, consideration, and involved parties; and maintaining meticulous records supporting VAT refund applications across multiple jurisdictions.
Practitioners likewise caution that compliance risk exposure and deadline requirements remain challenging. Some jurisdictions require local VAT registration at the tooling supply location, and refund applications often must be filed within strictly defined timeframes – in some cases, fewer than six months following year-end. Erroneous tooling transaction classification may lead to unintended VAT liabilities, blocked input tax deductions, refund procedure risks, and contract design challenges.
Conclusion
The Brose Prievidza judgment represents a decisive judicial pronouncement on the territorial prerequisites for intra-community supply qualification under the VAT Directive. The Court’s unequivocal position – that physical cross-border movement constitutes an indispensable condition for exemption eligibility – reaffirms formalism over functionalism in determining VAT treatment of transnational transactions. This holding preserves the integrity of the VAT system’s territorial foundations while simultaneously validating legitimate commercial structures that separate legal ownership from physical location.
The decision’s practical implications extend well beyond the automotive sector. Any enterprise engaged in cross-border production arrangements involving specialized equipment must carefully evaluate its contractual and operational structures against the Brose Prievidza framework. The ruling confirms that economic substance, group affiliation, and functional interdependence cannot substitute for the objective requirement of physical goods movement across Member State borders. However, the Court’s nuanced analysis of single supply doctrine and ancillary service classification provides valuable guidance for distinguishing genuine business arrangements from artificial tax-motivated structures.
From a broader policy perspective, the judgment strikes an appropriate balance between anti-abuse concerns and commercial reality. By requiring actual physical movement for exemption while simultaneously refusing to recharacterize genuinely independent transactions based solely upon economic linkage, the Court has articulated a rule that is both administrable and respectful of legitimate business needs. The extensive analysis of the Brose group’s operational rationale demonstrates judicial recognition that modern manufacturing networks involve complex, multi-jurisdictional arrangements that, absent evidence of tax abuse intent, merit evaluation on their own commercial merits.
For practitioners, Brose Prievidza underscores several critical imperatives: meticulous documentation of transactional independence; careful contract drafting to delineate separate supplies; prompt VAT refund applications within applicable limitation periods; and comprehensive analysis of group structures to ensure alignment with both operational objectives and tax compliance requirements. The decision affirms that while formalistic requirements cannot be circumvented through creative structuring, neither will tax authorities be permitted to disregard genuine commercial arrangements merely because they involve related parties or integrated production processes.
Ultimately, Brose Prievidza exemplifies the CJEU’s commitment to textualist interpretation of VAT legislation while maintaining sensitivity to contemporary business realities. The judgment provides much-needed clarity on a question of substantial practical importance, offering both taxpayers and tax administrations a reliable framework for evaluating complex cross-border tooling arrangements in an increasingly globalized manufacturing environment.
Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.
