Insights

Germany: Push for VAT and Transfer Prices Classification

Rainald Vobbe 06 Feb 2026

An analysis by Flick Gocke Schaumburg, Taxand Germany

Transfer prices are crucial in international corporate groups as they set the pricing for numerous goods and services exchanged within the group. They are used to allocate profits for income tax purposes, ensuring that intra-group transactions are treated as if they occur between unrelated third parties.

The management of transfer price adjustments (TPAs) for VAT purposes is a recurring issue for companies, tax authorities and courts. Recently, the German Advocate General at the Court of Justice of the European Union, Juliane Kokott, outlined the difference between three types of TPA for VAT treatment:

1. Purely income tax-related TPAs (e.g. carried out by the tax authorities in tax audits years later) for the allocation of profits to a state, which only lead to income taxes but (usually) not to payments between the companies
2. TPAs for creating income and expenses where the resulting payments constitute the (initial) remuneration for a supply of goods or services, and may therefore give rise to an exchange of services
3. Cases in which services were supplied and TPAs are made in the form of payments relating to goods or services already provided

Rainald Vobbe and Justus Löber from our German member firm Flick Gocke Schaumburg provide further analysis on the topic, which you can read below:

VAT and transfer prices: Advocate General pushes for clear classification

Introduction

Transfer prices play a key role in international corporate groups, as they govern prices for the large number of goods and services exchanged between undertakings. Transfer prices are used to allocate profits for income tax purposes, ensuring that intra-group transactions can be calculated as if they were between unrelated third parties (in line with the arm’s length principle). Subsequent adjustment/settlement payments between individual companies are often necessary in order to achieve an appropriate result for income tax purposes.

The question of how transfer price adjustments (TPAs) are treated for VAT purposes is a recurring issue for companies, tax authorities and courts. And yet, there is no specific legal regulation or at least administrative instructions.

Recently, the ECJ has made several rulings on the VAT treatment of TPAs. Unfortunately, however, it has failed to clearly define the relationship between TPAs and VAT. The ECJ’s rulings relate only to individual cases, meaning that a real system cannot – or can scarcely – be derived from them.

This could change in the near future. In January 2026, Advocate General Kokott published her Opinion on the pending proceedings in a case involving Stellantis Portugal (C-603/24). In doing so, she also referred to the overall transfer pricing situation still requiring clarification. In an Opinion well worth reading, Advocate General Kokott attempts to develop a system for the VAT treatment of TPAs in VAT law.

Background

Stellantis Portugal is active in the automotive trade and forms part of the General Motors group. This group includes original equipment manufacturers (OEMs), which manufacture the products, as well as national sales companies such as Stellantis Portugal. Stellantis Portugal acquired vehicles from the OEMs and resold them to independent authorised dealers in Portugal. The dealers, in turn, sold the vehicles to end customers. Where manufacturing defects occurred, end customers could contact the authorised dealer to have them fixed. The costs were subsequently invoiced to Stellantis Portugal. Stellantis Portugal then informed the OEM of the distribution costs it had incurred (vehicle repair, operating costs such as personnel, electricity and marketing costs). The price of the vehicles sold by the OEMs was then adjusted on the basis of these costs.

These adjustments were made pursuant to an intra-group transfer pricing agreement. This provided for an adjustment in such a way that the OEM’s actual operating profit corresponded to the target operating profit. The adjustment was then made via credit or debit notes. The Portuguese tax authorities assumed that Stellantis Portugal had provided a domestic service to the OEM, meaning that Portuguese VAT would be incurred.

Classifying transfer price adjustments

In principle, TPAs can impact VAT only if there is a direct link to individual services. Further, in her Opinion, Advocate General Kokott envisages three different ways in which transfer prices can be classified under VAT law. Firstly, the TPAs may constitute remuneration for an independent supply of services. Secondly, the TPAs could also relate to a change in the assessment base (taxable amount) (Sec. 17 of the German VAT Act (Umsatzsteuergesetz – UStG)). Finally, the TPAs could be completely irrelevant for VAT purposes.

In any event, the settlement payment itself cannot be relevant for VAT purposes. As the Advocate General states, VAT, as a tax on consumption, is intended to tax the cost of a consumable good. A payment is therefore only relevant for VAT purposes if it is made “for” a service (service in return for payment). Consequently, when the referring court asks whether the reduction in the purchase price can constitute remuneration for a service, this cannot be inferred from the payment itself. Such a service also does not include bearing the warranty costs, as these are ultimately passed on to the OEM. The mere bearing of costs cannot constitute a service.

In addition, the ECJ has already taken a stance on the relationship between TPAs and VAT in the Arcomet Towercranes case (C-726/23). In this case, the ECJ regarded the price adjustment as remuneration for the services provided. This was because the parent company had provided administrative services to the subsidiary on the basis of a contract, which created a specific advantage for the subsidiary by enabling savings to be made and an improvement in service to customers to be achieved. As the adjustments were directly related to the services, they constituted remuneration that must be recognised for VAT purposes.

The Advocate General also addresses this case in her Opinion. Furthermore, it is correctly stated that the retroactive adjustment of transfer prices by the tax authorities for the purpose of adjusting profits cannot have any effect on VAT. After all, the tax authorities themselves are not involved in the exchange of services, meaning that the required connection with the services is missing.

Essentially, the Advocate General distinguishes between three types of TPA for VAT treatment:

1. Purely income tax-related TPAs (e.g. carried out by the tax authorities in tax audits years later) for the allocation of profits to a state, which only lead to income taxes but (usually) not to payments between the companies.
2. TPAs for creating income and expenses where the resulting payments constitute the (initial) remuneration for a supply of goods or service and may therefore give rise to an exchange of services.
3. Cases in which services were supplied and TPAs are made in the form of payments relating to goods or services already provided.

The Advocate General considers such a case – as described under 3. – to exist in the proceedings in question, since it is a subsequent adjustment of an undetermined but determinable price. This is because the prices for the vehicles were still undetermined under the agreement and were merely reference prices that could be adjusted upwards or downwards depending on the development of certain parameters (distribution costs and guarantee costs assumed by Stellantis Portugal). The purchase price calculation was linked only to the OEM’s operating margin. The ECJ had already dealt with such variable pricing from a customs law perspective in the Hamamatsu (C-529/16) and Tauritus (C-782/23) cases, which the Advocate General also mentions. However, the customs law focus is different, as the issue of price influencing between affiliated undertakings is explicitly regulated in Art. 70(3) lit. d UCC. In her Opinion, the Advocate General seems to be opposed to a general treatment of TPAs and the resulting payments as remuneration for the unique cases of supply of services that do not fall within the scope of Sec. 15a(3) sentence 1 UStG.

Outlook

Firstly, the Opinion should be welcomed in that it does not, as previously, deal with only a specific individual case. Unlike Advocate General Richard in the Arcomet Towercranes case, Advocate General Kokott assumes that the ECJ can and must make fundamental statements on the subject. Otherwise, the individual issues will continue to be the subject of legal disputes. Due to previous case law and the lack of (administrative) regulations, this problem currently exists for taxpayers. This consequently creates considerable uncertainty in the classification of TPAs. The formation of case groups can at least limit these uncertainties. However, it remains to be seen whether the ECJ will take the opportunity to comment on the general relationship between TPAs and VAT or whether it will once again only assess specific special cases. Irrespective of whether one shares the Advocate General’s view, it would be desirable for companies if the ECJ were as clear in its decision as the Advocate General is in her Opinion. Until then, uncertainty remains for companies.

For companies, possible relevance for VAT purposes means clearly classifying the reasons for the payment and answering the question of whether this is for a service or whether there is a connection to supplies of goods or services already provided. For companies that are not fully authorised to deduct input tax, the relevance of TPAs for VAT purposes could lead to additional burdens.

It would be a welcome improvement if, in addition to an ECJ ruling, there were finally clear regulations on this matter in the member states or, even better, at the EU level.

This applies in particular if the parties involved have a full input tax deduction right. This is because it is not clear why any TPAs should be tracked for VAT purposes at all, just as there is no need for an adjustment to the minimum taxable amount if the service recipients are fully entitled to deduct input tax.

Authors:

Rainald Vobbe, Justus Löber

Article tags

EU | Germany | Tax | Transfer Pricing | VAT