Will the Stellantis judgment bring clarity across the EU on the VAT treatment of transfer pricing adjustments?

The Court of Justice of the European Union (the “Court”) has, for the first time, ruled in a case directly addressing the VAT implications of transfer pricing adjustments. This is a highly significant and controversial issue across the EU due to the absence of a harmonised approach among Member States.

Although the Court’s judgment in Case C-603/24 Stellantis Portugal points to two different approaches to the VAT qualification of transfer pricing adjustments, it nevertheless provides clear guidance on when such adjustments should be regarded as VAT-neutral and when they may affect the consideration for supplies of goods or services.

Background of the case

Stellantis Portugal distributed vehicles in Portugal under brands belonging to the General Motors Group. The company purchased vehicles from European manufacturers and resold them to Portuguese distributors. The purchase prices of the vehicles acquired from the European manufacturers were adjusted based on the actual operating profits achieved. This required taking into account, among other things, vehicle warranty repair costs and general operating expenses, including personnel, electricity and marketing costs.

Under the General Motors Group transfer pricing policy, initial prices were established by applying a gross discount margin to the projected external resale prices, followed by subsequent transfer pricing adjustments to align the transfer prices with arm’s length conditions based on the actual operating profits achieved.

Within the General Motors Group, transfer pricing adjustments were documented through debit and credit notes and treated as outside the scope of VAT. However, the tax authorities took the view that Stellantis had supplied services to foreign suppliers which, under the Portuguese legislation applicable in 2009, should have been subject to Portuguese VAT. These assessments were challenged before the Portuguese administrative courts, which in turn referred a question to the Court of Justice of the European Union regarding the VAT treatment of transfer pricing adjustments.

The CJEU’s assessment

The Court concluded that the transfer pricing adjustment in the case should not have any VAT consequences and, in particular, should not constitute consideration for a taxable supply of services. According to the Court, this conclusion followed from the fact that:

• the adjustment mechanism was determined in an agreement concluded between related parties and was intended to guarantee a predetermined profit margin on the resale of the vehicles for the reseller;
• the amount of the adjustment was documented by a debit or credit note; and
• the adjustment was calculated, in particular, by reference to costs incurred by the vehicle distributor.

In its reasoning, the Court emphasized the methodology used to calculate the adjustments, which took into account various operating costs incurred in connection with vehicle distribution and not solely warranty repair costs. The Court considered the link between the adjustment and the services performed by the distributors to be merely indirect and concluded that the purpose of the adjustment was to ensure a target profit margin on the resale of the vehicles.

Importantly, however, the Court expressly noted that the position could be different if related parties structured their business arrangements in such a way that the distributor became obliged to provide services in return for remuneration equal to the amount of the adjustment. In such circumstances, the connection between the respective supplies could justify either the existence of a VATable transaction or an adjustment to the consideration for that transaction.

Significance of the judgment

In our view, the Court correctly recognised that the VAT qualification of a transfer pricing adjustment depends on the nature of the adjustment and the manner in which it is calculated. It is particularly appropriate that the Court stressed that where an adjustment is intended solely to bring the profit margin to an arm’s length level, it should not affect VAT settlements.

In Poland, adjustments are often referring to profitability indicators for a given period, designed to ensure a target level of profitability resulting from benchmarking studies. Such transfer pricing adjustments, being unrelated to the pricing of specific goods or services, are generally treated as VAT-neutral and documented by accounting notes. The Court’s judgment confirms the correctness of this approach. We hope that a consistent position will now be adopted across the EU, thereby simplifying annual transfer pricing adjustment processes for multinational businesses.

At the same time, cost-plus adjustments are also frequently encountered in practice. These are based on different assumptions, such as comparisons between budgeted and actual costs, and under current Polish case law are generally regarded as affecting VAT settlements and therefore requiring corrective VAT invoices to be issued. It appears that this approach should also remain valid following the Court’s judgment, since in such cases the remuneration is ultimately determined “in an amount equal to the adjustment made”.

Although the judgment does not address every possible transfer pricing adjustment methodology, it should significantly reduce uncertainty regarding the VAT consequences of the majority of such adjustments.