Consignment Stock Agreement

What is a consignment warehouse and why you should take it seriously

A consignment warehouse is a unique type of warehouse collaboration. Typically, when you order goods, they immediately become your property—you then bear all the risks, must store and insure them, and face the risk of not selling them.

With a consignment warehouse, it's different. The supplier physically places the goods in your warehouse or a storage unit on your premises but remains the owner. You take the goods gradually, as you need them, and pay only for what you have actually taken.

In practice, this could be a car mechanic with a consignment stock of spare parts, a medical facility with medical supplies in a ward, or a manufacturing company that keeps a box of fasteners at a workstation—all the goods are still owned by the supplier, and everything is taken gradually and invoiced based on actual consumption.

It may seem simple, but the lawyers at ARROWS law firm know that problems in practice arise precisely where the parties thought they had resolved everything 'on paper' or just verbally.

One supplier may have dozens of consignment warehouses with various customers. A customer may suddenly be unsure whether they are obligated to purchase the goods physically on their premises or if it is just free storage. And when uncertainty arises regarding VAT, insurance, loss of goods, or supplier failure, chaos ensues. If a dispute between the supplier and the customer escalates (e.g., over liability for damages or contract interpretation), it is appropriate to handle the procedure within the framework of commercial and court disputes.

Legal framework and ownership rights

In the Czech Republic, consignment warehouses are not specifically regulated beyond general commercial and civil law. It is a so-called innominate contract (unnamed contract) under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code, as amended (hereinafter the "Civil Code")—which means that legislation does not directly regulate it as a specific type of contract (like a purchase agreement or a lease agreement), but the contracting parties define its content themselves.

Therefore, it is crucial to have a contract that clearly defines what is being agreed upon between you. A practical guide on how to distinguish a framework agreement from individual orders and when a more detailed contractual regime is needed can also be found in the article Business Contract vs. Purchase Order: When an Order is Enough and When a Company is at Risk.

The main legal question is: When and under what conditions does ownership of the goods transfer from the supplier to the customer? Under the Civil Code, ownership of a movable item is generally acquired when the purchase contract becomes effective and the item is handed over. In a consignment warehouse, this moment of sale and handover of specific goods occurs gradually—with each withdrawal of goods from the warehouse.

If your contract is vague or later becomes a point of contention between the parties, the question may arise as to whether the goods were actually taken or merely "moved" within the physical warehouse. Therefore, the contract must explicitly define the moment of transfer of ownership. In the vast majority of cases, the following setup is used: ownership is transferred at the moment the goods are physically removed from the warehouse based on a dispatch note or a confirmed consignment list (a list of goods taken), which concludes the purchase contract for those specific goods. The invoice is then based on this list.

Note: in some industries—pharmaceuticals, healthcare services, the automotive industry—there may be specific rules arising from obligations imposed on you or the supplier by special legislation (e.g., batch traceability, specific storage conditions). ARROWS law firm takes this into account—it's not just about the general legal framework, but also the specifics of the given industry.

Liability for Goods and Insurance

One of the most frequently overlooked questions: Who is liable for the loss, damage, or theft of goods that are physically in your warehouse but are not yet your property? Although the Civil Code regulates general liability for items in possession or custody, in the case of a consignment warehouse, it is standard practice for the contracting parties to explicitly regulate liability.

It is commonly agreed that the customer (the warehouse holder) is liable for the goods from the moment the supplier places them in their warehouse until the moment of ownership transfer or their return to the supplier. This means that if the goods are lost, damaged, or stolen, the customer will be held responsible for them, either in the sense of having to pay for them or arranging for their replacement.

This arrangement has its logic—the customer has access to the warehouse, control over the movement of goods, access for individuals, and an overview of what is happening inside. The supplier cannot effectively monitor their property remotely in someone else's warehouse. It is crucial that this liability is explicitly stipulated in the contract—otherwise, the parties may argue about the extent and timing of the transfer of risk.

Insurance is key. If, in practice, unpaid invoices for withdrawn goods are also an issue (typically in a dispute over what was actually dispatched), the related text Has a Client Not Paid You? How to Claim Your Money in Court may be useful. If you do not agree in the contract who is obliged to insure the consignment goods, a situation may arise where the goods are lost, and both parties think the other was supposed to insure them.

In practice, it is most often stipulated that the customer (the warehouse owner), who actually manages the goods, is obliged to arrange for insurance of the goods, or insurance for their liability for damage to the goods. The contract should specify the amount and the risks against which the goods should be insured (theft, fire, flood, vandalism, etc.).

An even more crucial detail: when an insured event occurs and the insurance company pays out, it is necessary to clearly agree on who is the rightful recipient of the insurance payment. Since the supplier is the owner of the goods, it is standard for the insurance payment in the event of total loss or damage to go to the supplier (as the owner of the goods), not the customer.

Although the customer is the insured party, they are only so as the one arranging insurance for another's property or for their own liability. This must be clearly agreed upon; otherwise, the insurance company and the supplier may be in constant dispute over who the money belongs to.

Invoicing, Payments, and VAT Payment

Here, three perspectives converge: commercial, accounting, and tax. All must be in harmony. The commercial reality: An invoice is issued for the goods that the customer has actually taken from the warehouse. Invoicing occurs on an ongoing basis, usually once a month, according to the list (consignment) of goods taken. The invoice amount then depends on what was actually taken—not on what is merely stored.

The accounting aspect: The supplier keeps the consignment stock as its inventory (goods in stock) until it is invoiced. The customer records the goods in their accounting as their own inventory only at the moment of transfer of ownership and payment; until then, they can record the received goods as entrusted, if relevant for internal records.

This means that from the accounting perspective of both parties, the goods must be "reprocessed"—the supplier removes them from their assets once invoiced; the customer includes them as their inventory. In practice, this is often handled by linked information systems where the invoice is generated automatically from the confirmed consignment.

VAT—this is more complicated. Domestically (when both the supplier and the customer are registered for VAT in the Czech Republic), VAT is calculated at the moment the taxable supply occurs, i.e., when the goods are delivered. For a consignment warehouse, this means at the moment the customer acquires the right to dispose of the goods as an owner, which is usually the moment of physical collection of the goods from the warehouse (Section 21(1)(a) of Act No. 235/2004 Coll., on Value Added Tax, as amended, hereinafter the "VAT Act").

However, if the contract, which precisely determines when the invoice is issued and how the consignment is handed over, is not clear, VAT may be calculated incorrectly. The situation is even more complex if the supplier or customer is based in another EU member state. Then the goods are moved between states, and VAT is governed by a special "call-off stock" regime, which is regulated in Section 13a of the VAT Act. In such a case (valid as of 2026):

If the goods are moved by the supplier to another member state for the purpose of their delivery to a specific, known customer in that member state, this movement is not considered an intra-Community supply and acquisition of goods at the time of its movement. Instead, the taxable supply (intra-Community acquisition of goods) occurs only at the moment the customer takes the goods from the warehouse. The customer is then obliged to declare VAT in the member state where the goods are stored.

If the conditions are not met or the goods are not taken within 12 months (or are delivered to another entity), the warehouse regime is breached, and the supplier is obliged to declare an intra-Community supply of goods and register for VAT in the member state to which the goods were moved.

Practical risk: Many entrepreneurs assume that once they issue an invoice, everything with VAT is settled. In reality, if they issue the invoice at the wrong time or in the wrong phase, the VAT is incorrect, and it is not an accounting problem—it is a violation of the VAT Act. The Financial Administration then corrects this, often with a penalty.

The lawyers at ARROWS law firm know that consignment warehouses with cross-border supply require special attention. They will help you set up the invoicing and VAT system to be compliant with the law and to ensure you do not lose your VAT deduction or risk fines.

Aspects of Working with the Contract: What Must Be Inside

When you decide to set up a consignment warehouse with a supplier, the contract should contain at least the following elements:

1. Definition of Ownership and Transfer of Rights: It must be completely clear that the supplier remains the owner until the goods are actually taken and ownership is transferred. It should not just refer to a "purchase agreement" or "business terms"—it should be explicitly stated directly in the consignment contract.

2. Conditions of Collection and Moment of Ownership Transfer: How is "collection" defined? Is it enough for an employee to take it from the cabinet? Or must something be signed? Or is it reported in an IT system? The contract must clearly specify what counts as collection to avoid later disputes about whether the goods were actually "taken over."

3. Invoicing and Payment Method: How often are invoices issued (monthly, quarterly)? What is the payment term after invoicing (most often 30 days)? What are the late payment fees? How are incorrect invoices handled?

4. Liability for Goods: A detailed definition: from when is the customer liable (usually immediately after physical delivery to the warehouse), for what risks (theft, damage, expiration), and what are their rights and obligations when handling an insured event.

5. Insurance and Damages: Who insures, for what amount, against what risks, and who is the recipient of the insurance payment? What is the procedure for reporting an insured event?

6. Replenishment of Stock and Minimum Level: What stock level should the supplier maintain? What happens if the goods run out and the supplier does not replenish them in time? Is there a deadline within which the supplier must replenish the stock?

7. Return of Unused Goods: If the customer finds that they do not need certain goods, can they be returned to the supplier? Under what conditions? Who bears the cost of the return? This is crucial, especially for goods with a short expiration date.

8. Expiration Dates: For goods with a minimum shelf life (medicines, food, medical supplies), the contract must include rules for checking and replacing goods approaching their expiration date. It is usually agreed that the supplier is responsible for not placing goods near their expiration date in the warehouse and for conducting periodic checks.

9. Obligations and Rights of Both Parties: What is expected of the customer? Regular reporting, access to the warehouse for the supplier, a contact person? What is expected of the supplier? Regular inspections, problem-solving, communication?

10. Termination of the Contract: How is the contract terminated? Is it for a fixed or indefinite period? What is the notice period? What happens to the untaken goods after termination—does the supplier take them back, or must they be disposed of?

11. Dispute Resolution and Applicable Law: Which court has jurisdiction (e.g., the locally and materially competent court in the Czech Republic)? Which legal system applies (e.g., Czech law, excluding the UN Convention on Contracts for the International Sale of Goods)? Is out-of-court dispute resolution possible (mediation, arbitration)?

Practical Mistakes Often Made

• Verbal agreement without written form. Business is often conducted as "yeah, we'll put goods here, you call when you need them, and I'll send you an invoice every month." This is commercially convenient but legally disastrous. When a tax audit comes and asks exactly when the goods were transferred to you, you have no proof. "We were sure" doesn't count—evidence does. Important matters (rights, obligations, liability, VAT) must be in the contract.

• Unclear payment and invoice timings. Many contracts contain the phrase "invoice due within 30 days of issuance." But who issues it? When? Based on what? If it's not clear, one party might issue an invoice for a different quantity of goods than what the other's records show. Then you're dealing with complaints, returned invoices, and disputes over what was actually taken. Time is wasted, and the relationship deteriorates.

• Absence of insurance or unclear insurance conditions. The customer often thinks: "It's just parts in a box, what could happen?" And then a fire, leak, or theft occurs, and no one knew it should have been insured or for what amount. The insurance company then says it cannot pay because the contract or policy was not arranged correctly. The goods are gone, invoices remain unpaid, and everyone is angry.

• No regular reporting. The supplier occasionally comes by and checks what's left. But nothing is systematic. Then it's discovered that there were, for example, 200 parts, but now there are 80—and no one knows when or why 120 disappeared. Month after month, it accumulates until one day someone calculates a million-crown loss that is unexplained. The contract should include an obligation for the customer to regularly report the stock status so that the supplier is informed and problems are addressed on an ongoing basis.

• A quiet end without settlement. One stops delivering, the other stops taking, but no one resolves anything. Unused goods remain, unresolved invoices hang in the air, and when a dispute arises later, it's not clear what was contractually agreed upon or what the rights and obligations of the parties are. The settlement at the end must be in the contract and must be carried out systematically.

Tax Aspects – VAT and Intrastat

If the supplier or customer is based in another EU country, the situation becomes more complicated. The goods are "moved" between countries, which has implications for VAT and Intrastat reporting.

VAT domestically: If both parties are registered for VAT in the Czech Republic, it is essentially simple—VAT is calculated at the moment the taxable supply occurs (i.e., when the goods are actually taken and ownership is transferred). It is important that the contract clearly defines what this moment means.

VAT in a cross-border situation: If the supplier is, for example, in Austria and the customer is in the Czech Republic, this is a movement of goods. Here, the special "call-off stock" regime under Section 13a of the VAT Act, valid as of 2026, is often applied. In such a case:

If the goods are intended for a single, known customer who is registered for VAT in the Czech Republic, and the supplier is not established in the Czech Republic, an intra-Community supply of goods does not occur at the moment of their movement into the warehouse in the Czech Republic.

The customer then declares VAT on the intra-Community acquisition of goods in the Czech Republic, but only at the moment of actual collection of the goods from the warehouse, and no later than 12 months after stocking.

To apply this simplification, the supplier must keep detailed records of the goods under the warehouse regime. If these records are not kept properly, other conditions are not met, or the goods are not taken within 12 months, the warehouse regime is breached. In that case, the movement of goods is retroactively considered an intra-Community supply of goods by the supplier, who must then register for VAT in the Czech Republic.

Goods are reported to Intrastat at the moment they physically cross the border between member states—not at the moment of invoicing. So, the movement to a consignment warehouse in another member state is reported in Intrastat by the supplier as a dispatch (transaction code 19) and by the customer as a receipt (transaction code 29) in the month the goods physically move.

Later, when the customer takes them from the warehouse and ownership is transferred, this transaction is not reported to Intrastat again—this is an internal movement within the member state that was covered by the previous report. This setup requires a very careful procedure and high-quality invoicing and data records. The lawyers at ARROWS law firm are well-versed in these opportunities—they can help you set up procedures to ensure compliance with VAT rules and correct Intrastat reporting.

Final Summary

A consignment warehouse is an elegant solution for both parties—the supplier secures a long-term collaboration and distribution of goods, while the customer saves on storage and inventory financing.

But the legal and tax framework in which it operates is more substantial than many entities intuitively realize. Without a quality contract, an elegant collaboration quickly turns into a legal mess that is then resolved through disputes, arbitration, and costly legal proceedings.

Specifically, the contract should be:

• Clear and complete – all important points (ownership, liability, insurance, invoicing, VAT) must be explicitly defined.

• Legally correct – it must adhere to the Civil Code, the VAT Act, and possibly other special regulations valid as of 2026.

• Practical – it must reflect the reality of your operations and be understandable to everyone who will use it daily.

• Protective – it must protect you from common risks (loss of goods, non-payment, disputes over the extent of liability).

The lawyers at ARROWS law firm know that every consignment situation is different in its details—and that a "generic solution" often leads to problems.

If you want to be sure that your consignment warehouse agreement has the correct legal framework and protects you from common risks, contact us. We will fix the contract, set up procedures, and be available to you in case something gets complicated.

Book a consultation with the lawyers at ARROWS law firm at consultation@arws.cz – they will help you prepare or revise the contract to be legally secure and commercially effective.