Court of Justice clarifies VAT rules for transfer pricing adjustments

No VAT without direct consideration

The Court reaffirms a fundamental principle of VAT law: a service is taxable only when there is a direct link between a concrete performance and a consideration actually received, within a legal relationship with reciprocal obligations.

In the Stellantis Portugal case, the Court found insufficient evidence of such a direct link. The main purpose of the intra-group netting in question was to ensure a previously agreed profit margin. Moreover, the adjustment was calculated on the basis of different cost elements, so the link to any services was at best indirect, according to the Court.

Transfer pricing adjustments not automatically subject to VAT

The ruling is closely in line with the Court's established case law on the requirement of a "direct consideration." The Court emphasizes again that not every payment within a contractual or economic relationship constitutes a taxable transaction.

What is new in this ruling is that those principles are now explicitly applied to intra-group transfer pricing adjustments.

Specifically, what does this mean for your business?

1. Analyze your transfer pricing policy

Check whether intra-group transfer pricing adjustments merely serve to adjust margins, or whether they are linked to specific performances or services within the group. The stronger the link with a specific service, the greater the risk of VAT liability.

2. Review contracts and internal documentation

Check that contracts do not implicitly refer to services when this is not intended. The wording of contracts, intercompany agreements and transfer pricing documentation can play an important role during tax audits.

3. Substantiate the lack of a direct link

Provide clear documentation showing that adjustments are based on overall margin targets and not on individual performance or services.

4. Evaluate the VAT position in existing structures.

This is especially true for sectors where warranty, repair or support costs play an important role, such as:

• automotive;

• technology;

• manufacturing;

• international distribution structures.

5. Prepare for tax audits

Tax administrations are likely to pay more attention to the distinction between:

• VAT-taxable services;

• and mere price or margin adjustments within groups.

That distinction is important, since only legally due VAT is deductible.

Decision

With the Stellantis Portugal ruling, the Court of Justice confirms that transfer pricing adjustments are not automatically subject to VAT. What remains decisive is whether there is a direct link between a concrete supply and a payment.

For international groups, this is an important clarification, but at the same time a signal to thoroughly evaluate transfer pricing policies, contracts and VAT positions.