Transfer pricing between VAT and customs law: Current risks and the need for action

Transfer Pricing: More Than Just an Income Tax Issue

Transfer pricing has long been regarded as a classic area of income tax. The goal was to adhere to the arm’s length principle and comply with the requirements of the OECD Guidelines as well as Section 1 of the Foreign Tax Act (AStG). In practice, the VAT and customs implications of intra-group service transactions were often overlooked. Given current case law, this distinction can no longer be maintained.

Retrospective transfer pricing adjustments (“true-ups” or compensation payments) in particular are increasingly coming under scrutiny in VAT and customs audits.

VAT Treatment: ECJ Rulings 2025 and 2026 and Their Consequences

In its judgment of September 4, 2025 (C-726/23 – Arcomet Towercranes), the European Court of Justice (ECJ) clarified that transfer pricing adjustments may constitute taxable consideration for a specific intra-group service rendered—provided there is a direct link between the payment and the service and this is clearly defined in the contract. What matters is the economic substance, not the designation of the payment (e.g., “margin adjustment”).

In the case at hand, a parent company had provided services to its subsidiary, with the remuneration based on the actual profit margin achieved. If the margin exceeded a specified range, a compensation payment was due. The ECJ ruled that this payment must be treated as consideration for a taxable supply if the underlying services are clearly identifiable. The consequence: VAT liability, including all requirements regarding invoicing, the reverse charge procedure, and input tax deduction.

In contrast, in its judgment of May 13, 2026 (C-603/24 – Stellantis Portugal), the ECJ appears to view transfer price adjustments more as a subsequent change to the tax base for supplies rendered. In the case at hand, the plaintiff had received vehicle deliveries from group companies and resold the vehicles to external authorized dealers. In cases of defect rectification under warranty, the authorized dealers had performed the repairs and invoiced the plaintiff. The plaintiff’s profit margin was adjusted in each instance through transfer pricing adjustments to the purchase prices of the delivered vehicles. In doing so, the plaintiff’s costs for the repair services were also taken into account.

For German companies, this means: Numerous transfer pricing adjustments previously classified as “non-taxable” may in the future become subject to VAT either as services or as supplies—often without the processes and documentation being prepared for this.

Customs Valuation: BFH Ruling 2025 and New Requirements for Customs Value

In parallel with VAT, the situation is also tightening in customs law. In its ruling of July 15, 2025 (Case No. VII R 36/22), the Federal Fiscal Court (BFH) decided that retroactive price increases within a group constitute strong evidence of a price-influencing relationship. This can call into question the originally declared customs value.
The consequence: Additional customs duties and import sales tax may be imposed if transfer pricing adjustments lead to a subsequent price increase. The burden of proof lies with the importer, who must demonstrate that the originally declared transaction value was at arm’s length despite the affiliation. A particularly critical point: While price increases can lead to additional payments, a reduction in the customs value due to subsequent price discounts is generally ruled out under current case law. Companies face significant documentation and proof requirements in this regard.

Practical Implications: Inconsistencies, Risks, and Common Sources of Error

Current case law makes it clear: Inconsistent transfer pricing systems harbor significant multiple risks. Typical sources of error include:

• Price adjustments required for income tax purposes that are treated as taxable exchanges of services for VAT purposes but are rejected under customs law as price-influenced.
• Missing or unclear documentation of the underlying services and payment flows.
• Uncoordinated contracts that do not sufficiently account for the requirements of the various tax types.
• Lack of monitoring in margin-based transfer pricing systems.

Without an integrated approach, there is a risk of back taxes, interest, and intense discussions during corporate and customs audits.

Recommendations for Action: How to Avoid Multiple Risks and Additional Tax Payments

Companies should take action now and put their transfer pricing systems to the test. Specifically, we recommend:

• Review existing transfer pricing models for implications under sales tax and customs law.
• Analyze and, if necessary, adjust transfer pricing adjustment clauses, particularly for ex-post mechanisms.
• Ongoing monitoring of margin-based models and, where possible, prospective price adjustments.
• Reconciliation of transfer pricing documentation, service agreements, and actual processes.
• Assessing existing import structures with regard to customs value and import sales tax risks.
• Amendment of contracts, billing, and compliance processes to avoid cross-tax risks.

A structured risk analysis and the legally compliant further development of transfer pricing, sales tax, and customs processes are now essential.

Conclusion: Roadmap for Integrated Transfer Pricing Compliance

The latest rulings by the ECJ and the BFH mark a turning point: transfer pricing must be considered and documented across all tax types. Companies that act now can avoid multiple risks and strengthen their compliance. An integrated approach is the key to safely and efficiently structuring intra-group service and supply relationships.