While the value added tax system can be considered largely harmonised within the European Union, in practice we still often come across cases where the two Member States in question judge a given transaction differently. Below we present one such case.
According to the Hungarian VAT Act, the sale of a product which underlies an installation or assembly carried out by the vendor or by another party is considered a product supply. In this case, the place of performance for the product is where the product installation or assembly takes place or where the product is put to use.
In contrast to the Hungarian legislation, the German VAT Act makes a distinction in these cases between a product supply involving product assembly (Werklieferung) and the assembly work carried out on the product (Werkleistung). In both cases the vendor invoices a fee to the customer, and the price of the product includes the cost of the service performed, but the regulation still treats the transactions differently.
The two concepts are separated principally based on quality criteria; what is crucial here is whether the service provider uses materials or auxiliary materials during the assembly or repair. Quantitative criteria (such as the value of the work performed or the materials used) are not very important when considering the tax law implications of the transaction. In practice, therefore, taxpayers often find it difficult to decide whether the work they perform is a product supply or a service provided.
Since this became more important from 2010 with the change in provisions regarding the place of performance for services, the German Ministry of Finance issued information in December 2012 on separating the supply of products and the provision of services in the case of repair work carried out on products. According to this information, it should be considered a product supply if the value of the materials used in the repair account for more than half of the repair value.
However, the information does not provide clear guidelines on services and product supplies which apply to the very first assembly or installation of a product.