Contract manufacturing occurs when a company (the client) entrusts another company (the contract manufacturer) with a specific task involving goods that remain the property of the client.
The company carrying out the work does not acquire the goods, but provides a manufacturing service. The remuneration received therefore relates exclusively to the work carried out and not to the sale of the product.
Typical examples of contract manufacturing include:
The invoice always relates solely to the processing service and not to the supply of the processed goods.
Contract manufacturing with foreign clients or suppliersThe foreign client will, where applicable, apply its own national VAT rules.
2) Italian company receiving contract work from abroadThis means that VAT is not charged by the foreign supplier, but is paid directly by the Italian customer in accordance with the procedures laid down by Italian legislation.
The main reference is Article 17, paragraph 2, of Presidential Decree 633/1972.
Proper document management is essential to demonstrate that the transaction is indeed a contract processing operation and not a supply of goods.
It is advisable to draw up a contract or a processing order setting out the details of the assignment.
It is of fundamental importance to document the movement of goods using:
The processing of goods within the EU requires the completion of Intrastat forms relating to goods, to monitor the movement of incoming and outgoing goods, and Intrastat forms relating to services, to report the value of processing services received or provided.
For certain transactions, there are thresholds exempting operators from the obligation to submit Intrastat forms. However, services provided to EU entities (invoices issued) must always be reported, regardless of the volume of transactions.
If the party carrying out the activity uses mainly its own materials and delivers a finished product, the transaction may be classified as a supply of goods rather than a supply of services.
This distinction is particularly important in international transactions as it can completely alter the VAT treatment and customs obligations.