VAT and transfer prices

The Court of Justice of the European Union has issued a judgment in Case C-603/24 Stellantis Portugal , concerning the VAT implications of transfer pricing adjustments. The case contributes to the ongoing debate on whether and when settlements between related entities, aimed at ensuring a certain level of profitability, may affect VAT settlements.

The judgment’s conclusions are positive for taxpayers, but they do not support the conclusion that transfer pricing adjustments always fall outside the scope of VAT. This confirms the need to analyze whether a transfer pricing adjustment should be treated as remuneration subject to VAT.

What was the case about?

The case involved a Portuguese company within the General Motors group, the legal successor of which is Stellantis Portugal. The company acted as a national distributor, purchasing vehicles from group manufacturers and then selling them to independent dealers in Portugal.

In the event of specific vehicle defects, warranty repairs, or roadside assistance, dealers performed repairs. They then billed the Portuguese company for the costs of these repairs, including VAT.

At the same time, the group had a transfer pricing agreement in place. This stipulated that the distributor should achieve a predetermined profit margin. Therefore, at the end of a given period, transfer prices were adjusted through credit or debit notes issued by manufacturers. Various distribution costs, including repair costs and the distributor’s operating costs, were taken into account in calculating the adjustment.

The Portuguese tax authority found that under this model, the company provided vehicle repair services to manufacturers, and the transfer pricing adjustment constituted remuneration for these services. Consequently, the authority concluded that the company was subject to a VAT settlement obligation.

Preliminary question

The Portuguese court asked the CJEU whether an adjustment to the sales price of vehicles, provided for in an intra-group agreement in order to ensure a certain profit margin for the distributor and confirmed by a credit or debit note, falls within the concept of a supply of services for consideration under VAT.

CJEU ruling

The CJEU recalled that not every payment or adjustment to accounts between related entities constitutes consideration for a service. For VAT purposes, it is necessary to determine whether the parties are in a legal relationship in which one of them provides a separable service and the other pays consideration for it (the possibility of directly linking the service to the amount of the adjustment).

In the case at hand, the Court found that the information provided did not indicate that the intra-group agreement governing transfer pricing rules established an obligation for the distributor to provide vehicle repair services to manufacturers. The purpose of this agreement was to establish a transfer pricing mechanism and ensure a certain level of profitability for the distributor.

It was also significant that repair costs constituted only one calculation element of the adjustment. The adjustment also included other distribution costs and could result in the issuance of either a credit or debit note. According to the CJEU, this mechanism indicates that any potential connection between the repairs and the adjustment was, at most, indirect.

Consequently, the CJEU ruled that a transfer pricing adjustment does not constitute remuneration for the provision of services for consideration, unless in a specific case it is demonstrated that a legal relationship exists under which the company purchasing the vehicles provides a service to the seller and the adjustment constitutes remuneration for that service.

At the same time, the Court noted that if the adjustment does not constitute remuneration for a service, it should still be considered whether it affects the taxable amount of the supply of goods, i.e. whether it constitutes a change in the price paid for the vehicles.

Conclusions from the judgment

The judgment confirms that the effects of transfer pricing adjustments for VAT purposes should be assessed on a case-by-case basis in light of their economic function, contractual basis, and method of calculation. The mere fact of making a transfer pricing adjustment does not determine its VAT neutrality or its recognition as remuneration for the taxable provision of services.

In this regard, we can offer you support in:

• review of the applied transfer pricing adjustment mechanisms in terms of VAT,
• analysis of intra-group agreements and settlement documentation,
• assessing whether the method of calculating and documenting corrections is consistent with their economic justification,
• identifying potential VAT and TP risks related to TP adjustments.