Important!
The interpretations of the courts to date leave no illusions – the tooling agreement successfully functions in the Polish legal reality, what’s more: it brings tangible benefits to both the commissioning and executing parties.
What is a tooling agreement?
Two entities are involved in the conclusion of the tooling contract: The Employer and the Contractor. The Principal, being in possession of fixed assets, makes them available to the Contractor – this may be for a fixed or indefinite period. Receipt at the disposal of funds is tantamount to the Contractor’s acceptance of the order – this is one of the conditions of the tooling contract. Another indispensable element of the agreement is the unambiguous formulation of restrictions related to the use of funds by the Contractor.
EXAMPLE
A company that manufactures parts for automobile air conditioning can enter into a tooling contract (as a Contractor) with an entity that has the necessary machinery or equipment (i.e., the Principal). In this situation, the Contractor undertakes to carry out an order for the Ordering Party (for example, to produce a specific number of sets of air conditioners). For this purpose, he receives at his disposal the above-mentioned. devices.
In the example given, it would still be necessary to describe in detail the scope of work stipulated in the order, as well as the rules under which access to fixed assets is granted. A key aspect of the tooling contract is that the fixed assets remain the property of the Principal throughout the term of the contract – the Contractor can only use them under certain conditions.
What are the conditions for using the funds in tooling?
It all depends on the arrangements between the parties to the contract, but most often we may encounter a situation in which the Contractor during the term of the contract:
- bears the cost of repairs and operating expenses;
- undertakes to insure the transferred funds for a specified amount;
- makes the fixed assets it uses available for inspection by the Principal (de facto owner of the assets);
- ensures regular technical maintenance of entrusted tools (e.g., car or computer equipment).
Benefits of tooling
Since a tooling contract is an equivalence agreement, both the Contractor and the Principal reap specific benefits. Which ones exactly?
What does the contractor gain?
Firstly: from the very fact of entering into a tooling contract comes the existence of an assignment, which means that the Contractor will earn from providing services to the Principal for the entire duration of the contract.
Secondly: The Contractor receives the necessary resources to carry out the Order, which means that he does not have to worry about investing in the purchase of machinery or other equipment.
Thirdly: large orders resulting from the tooling contract stimulate the growth of the Contractor’s company, allowing not only an increase in the number of jobs, but also the development of the skills of those employed.
What does the principal gain?
Firstly: thanks to the free transfer of funds to the Contractor, the Principal can depreciate the funds in question.
Secondly: services or goods contracted to the Contractor are purchased by the Principal at lower prices – this takes into account the contribution of the Principal in the form of the transfer of fixed assets for the contract.
Thirdly: An outsourcer using a tooling contract has a great deal of influence over the order being carried out – it can demand higher quality products or services, as well as giving them individual characteristics as they are made to order. The tooling contract may also specify a specific time of execution.
Tooling vs. taxes
What particularly distinguishes a tooling agreement is that none of the elements of the agreement are subject to PIT and VAT. Why is this happening?
- The Contractor does not provide a free service – instead, it uses the Ordering Party’s resources to perform the service. The equivalent nature of the contract makes Art. 11 paragraph. 1 of the PIT Law and there is no tax liability.
- The Contractor does not make a delivery of goods, as the goods produced are created using fixed assets that invariably belong to the Principal. The effect of this is that there is no VAT. Similarly – from the point of view of the law – there is no performance of services.
Tooling contract in law
As I mentioned at the beginning of the article, Polish law does not actually provide for the possibility of a tooling agreement – this document functions as one of the unnamed contracts. This means that there is no template for such an agreement, which on the one hand may raise concerns, but on the other hand is characterized by a fair amount of freedom in determining the terms of such an agreement.
Important!
All contracts, even unnamed ones, must be structured so that their provisions do not conflict with the Civil Code. The provision that details such situations can be found in the Art. 3531 KC: “Parties entering into a contract may arrange the legal relationship as they see fit, as long as its content or purpose does not oppose the properties (nature) of the relationship, the law or the principles of social intercourse.”
However, there is no need to worry – Polish courts have issued several interpretations over the past few years that confirm that tooling is a fully legal and unencumbered by legal riffraff.
Tooling contract interpretations
Concerns about the favorability of tooling agreements are allayed by independent individual interpretations made by the RP tax authorities. The conclusions of the interpretation allow you to use tooling agreements without fear. A solid foundation can be found in these documents, among others:
- Individual Interpretation ILPB3/423-449/13-2/PR of the Director of the Tax Chamber in Poznań dated December 18, 2013(source).
- Individual Interpretation IBPB-1-2/4510-267/15/AK of the Tax Chamber in Katowice dated September 28, 2015(source).
- Individual Interpretation ILPP4/4512-1-44/15-2/ISN of the Director of the Tax Chamber in Poznań dated May 6, 2015(source).
