Contract manufacturing and VAT in the EU: rules, Intrastat and reporting

What counts as contract manufacturing for VAT?

Contract manufacturing means processing goods owned by another business and returning a new product to that business. The processor supplies labour, technical know-how, machinery and sometimes secondary materials, but the principal keeps ownership of the main materials.

Four conditions should be checked before using this VAT treatment:

• the principal remains owner of the materials before, during and after processing;

• the materials supplied by the principal, plus the processing fee, represent the core value of the finished product;

• the processor returns the same materials or an equivalent quantity where equivalent return is accepted;

• the operation results in a new product with a different function from the materials supplied.

The new-product test is decisive. If the processor merely repairs a product, sorts it, cleans it or packages it without a real transformation, the analysis may move away from contract manufacturing. If the processor buys the main materials on its own account and sells the finished product, the transaction may be a supply of goods rather than a service.

Why the service and the goods movement must be separated

The processing invoice and the movement of goods are two different VAT workstreams. The processor's invoice is analysed as a service. The shipment of materials and return of finished goods are tracked as physical movements. The applicable VAT rates in the EU matter for the service leg and for any goods deemed transferred at customs value.

The right VAT treatment starts with three questions:

1. Who owns the goods before, during and after the work?

2. Where do the goods physically move?

3. Who invoices whom, using which VAT number?

How VAT applies to the processor's invoice

In a cross-border B2B EU scenario, contract manufacturing usually follows the general place-of-supply rule for services. The service is taxable where the business customer is established, so the processor normally invoices without local VAT and the customer self-accounts for VAT under the reverse charge.

For example, if a French company sends components to an Italian processor for assembly and the goods return to France, the Italian processor usually invoices the French company without Italian VAT. The French customer reports the purchase of services and the reverse charge in France, using the relevant French VAT return treatment.

If the service provider is established in France and supplies contract manufacturing services to a VAT-taxable customer in another EU Member State, the French supplier generally issues an invoice without French VAT. The transaction may also need to be reported in the French European Services Declaration, the DES, when the service falls within its scope.

Bilateral contract manufacturing: goods leave and come back

A bilateral flow is the cleanest scenario: the principal sends the goods to the processor and receives the processed goods back. The temporary nature of the movement is what keeps the VAT treatment under control.

Evidence is the heart of the file. You must be able to prove that the goods sent for processing came back after transformation, or that they followed the alternative scenario declared. Collection notes, CMRs, freight invoices, production orders and stock reconciliations become VAT evidence, not just logistics paperwork.

Trilateral flows: where VAT risk increases

A trilateral contract manufacturing flow adds one more party, country or destination. The VAT risk rises because the finished goods may no longer return to the Member State linked to the VAT number used by the principal. When three separate legal entities in three countries each own distinct rights over the goods, the flow may approach VAT triangulation territory, though contract manufacturing and triangular sales are distinct VAT analyses.

EU simplifications may avoid a local VAT registration in certain controlled cases, including: The Quick Fixes 2020 also introduced a harmonised call-off stock regime that may apply to some contract manufacturing flows.

• two successive processing services carried out in the same Member State;

• two successive processing services carried out in two different Member States;

• goods purchased in one Member State and processed in that same Member State;

• goods purchased in one Member State and processed in another Member State.

The final destination condition is the practical test. The goods must ultimately be dispatched or transported to the Member State that issued the VAT number used by the principal to receive the service. If that condition is not met, the principal may need a local VAT registration or a different goods-flow treatment.

When local VAT registration may be required

Local VAT registration becomes a real risk when the goods stop behaving like temporary goods. The processor's country can become a VAT country for the principal if the finished goods remain there, are stored there, sold there or dispatched elsewhere without an applicable simplification.

Review the scenario carefully when:

• finished goods are sold in the processor's country;

• finished goods are shipped directly to a customer in another Member State;

• part of the stock remains at the processor's site;

• the processor supplies a significant share of the main materials;

• the principal uses a VAT number from a country that is not the country of final arrival;

• the evidence does not connect the materials sent to the products returned.

In these cases, the issue is no longer only the processor's invoice. You must qualify the goods flow: deemed transfer, intra-Community acquisition, domestic supply, intra-Community supply, export or import depending on the real route. Any import or export leg also requires a valid EORI number to clear goods at the EU border.

Intrastat, EMEBI, ESL/DES and VAT returns

Contract manufacturing can trigger several filings that do not report the same thing. The common mistake is to treat the processor's invoice as if it solved the entire operation.

The French DEB reflex must be updated. Since the reform, France separates the statistical EMEBI logic from the VAT recapitulative statement logic for goods. Other Member States keep their own Intrastat thresholds, formats and filing rules.

Registers, proof of transport and valuation

Registers prove that goods were sent temporarily for processing and not sold. They should allow a chronological reconciliation between materials sent, goods received, goods processed, products returned and remaining stock.

The principal should document at least:

• product or material description;

• quantities, weights, volumes or units;

• destination and processor site;

• dispatch date;

• return date or exit date from the temporary scenario;

• nature of the operation: contract manufacturing or work on goods;

• processor's EU VAT number.

The processor should document:

• the principal's identity and address;

• the nature and quantity of materials received;

• entry dates;

• the nature and quantity of processed products delivered;

• exit dates;

• stock still held after the operations.

The value reported on the return movement must be consistent with the filing rules. In practice, reporting may require the value of the materials increased by the processing fee. Check the local Intrastat/EMEBI instructions before hardcoding a value rule into the ERP.

Operational checklist before shipping goods for processing

VAT must be locked before dispatch, not when the invoice lands in accounts payable. Use this checklist before the first movement of goods.

1. Identify who owns the materials before, during and after processing.

2. Confirm that the operation creates a new product, not just a repair or technical service.

3. List the departure country, processing country, possible storage country and final arrival country.

4. Check the VAT numbers used by each party.

5. Decide whether the processing service is invoiced without VAT and reverse charged by the customer.

6. Check whether an ESL, DES or local equivalent is due for the service.

7. Check Intrastat/EMEBI obligations in every country concerned.

8. Open the temporary goods register and the special processor register before the shipment.

9. Prepare transport evidence for the outbound and return movements.

10. Re-test the VAT treatment if the goods do not return to the principal's country.

If one element changes during production, review the VAT treatment. A clean bilateral flow can become a trilateral flow, then a local VAT registration issue, simply because the finished goods are delivered somewhere else. See our guide on the EC Sales List and Intrastat in France.