Case background
The case concerned a taxpayer engaged in the production and sale of chemical products. The applicant planned to commission a Polish service provider to manufacture chemical products using, in part, raw materials supplied by the applicant.
As part of its business operations, the applicant intended to deliver raw materials to the service provider’s facility located in Poland for the production of two products. In one case, the raw materials provided by the applicant represented well below 50% of the total materials used to produce the final product; in the other, well above 50%. The materials provided by the service provider were of an auxiliary nature in relation to those delivered by the applicant.
The applicant emphasized that the raw materials supplied would be handed over to the service provider for the purpose of using them in the manufacturing of the finished goods. The production process was outsourced to the service provider due to their experience, trustworthiness, and available technical resources.
The Applicant’s manufacturing process
The production process involved:
- specialized equipment for the high-pressure processing of the applicant's materials, human resources in the form of qualified personnel executing specific stages of the production, and
- materials entrusted by the applicant
The ratio of entrusted materials to the service provider’s own materials varied depending on the product. However, this ratio was not the decisive factor in selecting the service provider. The key factor was the ability to render the service itself; the applicant had no intention of purchasing any materials. The service provider’s materials, though necessary, were secondary and primarily served to ensure continuity in the production process. These materials could be procured independently by the provider, unlike the entrusted materials, which had a specific composition and proportions to ensure optimal quality-to-price ratio and market competitiveness.
Applicant’s opinion on the nature of the supply
According to the applicant, the entire arrangement should be regarded as a single, economically indivisible service that encompasses multiple activities. It should not be artificially split for tax purposes.
A single supply occurs particularly when one or more components are considered the main element, while others are auxiliary and therefore subject to the same tax treatment as the principal supply.
For a supply to be considered a composite (bundled) supply, it should consist of various activities that together serve a single economic objective.
Important
When does a composite supply occur?
A composite supply consists of a combination of activities aimed at achieving a specific objective — the performance of a main supply supported by auxiliary activities. An activity is deemed auxiliary if it is not an end in itself but merely a means to fully perform or benefit from the main supply. An individual activity is considered part of a composite supply if its purpose is determined by the main supply and it cannot be carried out or utilized independently of the main supply.
Therefore, from an economic standpoint, a supply should not be divided for tax purposes if it constitutes a single composite supply consisting of several auxiliary elements. However, if some elements serve purposes beyond merely supporting the main supply — that is, they have standalone significance — they should be treated as separate, independently taxable supplies.
Thus, a composite supply occurs when the relationship among individual activities provided to a single recipient allows distinguishing between a primary supply and auxiliary supplies — those that enable or are essential for the performance of the main supply. If these activities can be separated without affecting their character or value from the recipient's perspective, they should be treated as separate supplies for tax purposes.
Position of the Director of KIS
This position was upheld by the Director of the National Revenue Information (DKIS), who found that the activities performed by the contractor under the agreement with the applicant — namely, the manufacturing activities, supply of auxiliary materials, and storage of raw materials — constituted a composite supply. The described activities were interconnected and, from an economic perspective, formed a single whole. Their separation would be artificial. The main supply expected by the applicant was the manufacturing of the finished product. The provision of materials by the contractor was auxiliary and necessary to carry out the main supply.
Given the circumstances presented in the application, the DKIS concluded that the activities listed therein, which formed part of the supply performed by the contractor for the applicant, should be considered a composite service supply. It should be settled in accordance with the tax rules applicable to the provision of services. In the analyzed case, the determining factor for the tax classification was the service of producing products with specific parameters defined by the applicant.
The classification of a supply as a service or a supply of goods can be complex. The DKIS’s interpretation opens the door for a broader approach to evaluating the role of goods in the overall supply. Classification of supplies that involve both entrusted and contractor-provided materials often raises doubts. While authorities do consider factors beyond the share of the applicant’s materials used in the final product — such as the purpose of the supply or the role of entrusted materials — they often rely on the value of materials provided by the contractor, frequently applying a 50% threshold due to its clarity.
This interpretation, however, encourages a broader view, including other criteria such as the contractor’s technological capabilities, production capacity, and the impact of raw materials’ physico-chemical properties on the final product.
The percentage of raw materials used in the final product should not be the sole factor — other elements may be equally or even more significant in determining the nature of the supply.
