CJEU on VAT treatment of transfer pricing adjustments

As we described in our previous article on this topic, the case concerned a situation in which Stellantis Portugal, S.A., acting as a distributor, purchased vehicles and spare parts from affiliated manufacturing companies. It then resold them to independent dealers who in turn sold them to end customers. In the event of manufacturing defects, customers turned to the dealers who subsequently invoiced the distributor for the repair of the vehicles, meaning that the distributor ultimately bore the costs of the warranty repair.

Based on the reported costs of distributing the vehicles and spare parts, and of repairing the vehicles (including operating costs), the manufacturers subsequently adjusted the prices at which they sold the vehicles to the distributor. These adjustments were made under an agreed-upon transfer pricing mechanism ensuring that the distributor achieved the planned operating profit. As part of the adjustment to the sale price of the vehicles, the manufacturers issued the distributor with a credit note or a debit note. The Portuguese tax authority regarded the transfer pricing adjustment as a consideration for a supply of services by the distributor to the manufacturer, which should have been subject to VAT in Portugal.

Although the Advocate General proposed reformulating the question referred for a preliminary ruling, the CJEU did not follow that approach. In its judgment (C-603/24), it only considered whether the transfer pricing adjustment in the case at hand constituted a supply of services for consideration. It emphasised that a service is subject to VAT only where there is a direct link between the provision of the service and the consideration received. Such a direct link exists where there is a legal relationship between the supplier and the recipient under which the parties provide reciprocal performance, and the remuneration constitutes the actual consideration for the supply in question.

According to the CJEU, in the case under review there was no legal relationship between the manufacturer and the distributor that would oblige the distributor to arrange, for consideration, repairs of vehicles purchased from the manufacturer. Nor was there any other fact suggesting that the manufacturer and the distributor provided reciprocal performance to one another, with one consisting of repair services supplied by the distributor to the manufacturer and the other of remuneration for those services. The only legal relationship arose from the agreement concluded between them and solely related to the setting of the transfer prices of the vehicles.

Although the transfer pricing adjustment was calculated taking into account the costs of repairs carried out by independent dealers as well as the distributor’s operating costs, these were considered solely to ensure the pre-set profit margin. The distributor therefore had no certainty that, once the target margin had been achieved, the manufacturer would reimburse all of the costs, in particular the costs of repairing the vehicles. The CJEU therefore concluded that, in this case, the link between the repair services and the transfer pricing adjustment was only indirect.

The CJEU also emphasised that, if the transfer pricing adjustment were to constitute a subsequent adjustment to the price paid by the distributor upon the acquisition of the vehicles, it would be for the national authorities to assess the impact of such a change on the determination of the taxable amount.

In its judgment, the CJEU thus stated that a transfer pricing adjustment relating to vehicles which is (i) determined with the aim of guaranteeing that the distributor achieves a predetermined profit margin, (ii) evidenced by a credit note or debit note, and (iii) calculated with regard to costs incurred by the distributor in connection with vehicle repairs does not constitute a supply of services for consideration.