The General Rule: VAT Applies Where the Tool Is Supplied
Under standard VAT principles, the supply of tooling is treated as a standalone transaction. VAT is charged in the country where the tool is physically supplied, even if the tool is used exclusively to manufacture goods that are later exported.
This means that if a business provides tooling to a manufacturer in another country, and the tool never leaves that territory, the transaction is considered a domestic supply, usually taxable at the local VAT rate. In most jurisdictions, the ultimate export of the final goods does not change the VAT treatment of the tooling itself.
For many companies operating global supply chains, this often results in VAT being incurred which can have significant cash-flow implications.
Countries That Historically Applied a Derogation
While the general rule frames the international VAT position, a small group of countries has long diverged from this approach. These jurisdictions view the supply of tooling as ancillary to the manufacture and export of the final goods, meaning the tooling follows the same VAT treatment as the finished products.
These countries include:
- Bulgaria
- Sweden
- Switzerland and Liechtenstein
In practice, this meant that when the manufactured goods were zero-rated or exempted as exports or intra-Community movements of goods, the associated tooling could also benefit from zero-rating or exemption, even though the tool itself never physically left the country.
For multinational manufacturers, this treatment offered a welcome simplification and eliminated VAT costs.
However, recent developments signal that this landscape is changing.
A New Addition: Bosnia and Herzegovina Introduces Zero-Rating for Tooling (Effective August 2025)
From August 2025, Bosnia and Herzegovina will join the group of jurisdictions applying special rules for tooling. The country has introduced legislation allowing certain tools used exclusively for manufacturing export goods to be zero-rated, provided they meet specific criteria.
This means the supply of qualifying tooling will no longer be subject to local VAT, reducing cost and administrative burden for foreign companies that purchase tools from Bosnia and Herzegovina.
This legislative shift demonstrates a continued recognition, in some regions, that tooling plays an essential role in export-oriented production.
More details can be found in the official announcement from the Indirect Taxation Authority of Bosnia and Herzegovina.
The Turning Point: A Recent ECJ Case Re-Examines Tooling Rules in Bulgaria
Perhaps the most impactful development comes from the European Court of Justice. A recent ECJ judgment directly addressed Bulgaria’s long-standing derogation, ruling that the supply of tooling cannot be automatically treated as ancillary to the supply of the manufactured goods.
The court confirmed that:
- The supply of tooling is commercially separate,
- It does not automatically form part of the supply of finished products, and
- It should be assessed independently for VAT purposes.
This is a significant clarification. The ECJ effectively stated that Bulgaria’s existing approach, zero-rating or exempting tooling because the final goods are exported, does not align with EU VAT principles.
Because ECJ decisions set precedent for all EU Member States, this judgment has implications beyond Bulgaria. Sweden, which also applies similar derogations, may need to re-evaluate its treatment to align with EU law.
While legislative changes may take time to filter through, businesses relying on the old rules should be aware that the VAT position in both countries may shift in the near future.
What This Means for Manufacturers and Cross-Border Suppliers
With Bosnia and Herzegovina moving towards zero-rating and the EU potentially moving away from it, businesses supplying tooling across borders now face a transitional period with uneven rules.
Understanding the risks and opportunities is essential.
1. VAT may apply where you previously expected zero-rating
If Bulgaria or Sweden update their legislation to align with the ECJ judgment, domestic VAT will likely become the default treatment for tooling supplied locally.
2. Cash-flow planning becomes more important
Even when VAT is recoverable, timing matters. Tooling transactions can be high-value, and VAT refunds, particularly for non-resident businesses, may take months.
3. Contract structures may need revisiting
Many businesses structure pricing based on expected VAT treatment. If the VAT position changes, contracts may need to be updated to ensure clarity on who bears the tax cost.
4. Documentation will remain crucial
Where zero-rating still applies (e.g., under the new Bosnia and Herzegovina rules), businesses will need to meet strict conditions and maintain proof that the tooling is used exclusively to produce exported goods.
5. Refund opportunities may open, or close
Depending on how each country responds to the ECJ ruling, some businesses may gain access to VAT refunds they previously couldn’t claim, while others may lose favourable treatment they relied on.
A Period of Transition: Monitoring Local Developments
With multiple jurisdictions moving in different directions, the VAT treatment of tooling is becoming a patchwork of local rules, exceptions, and shifting interpretations.
Businesses operating across borders should keep a close eye on:
- Bulgaria’s legislative response to the ECJ ruling
- Any follow-up action from Sweden
- Implementation guidelines from Bosnia and Herzegovina’s tax authorities
- Industry-specific rules and interpretations in Switzerland and Liechtenstein
- The practical impact on VAT refund processes for non-resident companies
Local tax authorities may take time to issue guidance, and transitional periods often create grey areas. Staying informed is essential to manage compliance and avoid unexpected VAT exposure.
How VAT IT Can Help
Managing VAT on tooling can be surprisingly complex, especially when rules differ by country and change without much warning. At VAT IT, we help global manufacturers navigate exactly these kinds of cross-border challenges.
Our team monitors legislative updates, ECJ decisions, and local guidance so you don’t need to. We review your supply chain structures, identify where VAT may arise, and help you maximise your reclaim position. With our technology platforms, global expertise, and on-the-ground presence across 128+ countries, you gain the clarity and confidence to keep production flowing without VAT friction.
Whether you’re supplying tooling into the EU, Bosnia and Herzegovina, Switzerland, or anywhere else, we’ll help you stay compliant, reduce tax leakage, and protect your bottom line.
Conclusion
The VAT treatment of tooling is entering a transformative phase. While Bosnia and Herzegovina is moving toward zero-rating, the EU, driven by the recent ECJ judgment, may be moving the other way. Bulgaria and Sweden, long-standing outliers, may soon need to align their rules with the broader EU position.
For businesses operating in multiple territories, these shifts underscore the importance of proactive VAT planning. Understanding where VAT applies, where zero-rating still exists, and where change is coming can significantly reduce risk and unlock reclaim opportunities.
As always, VAT IT is here to help you navigate every step, making complex VAT rules feel effortless, and turning uncertainty into opportunity.
