RSM Ireland VAT newsletter - Summer update

The CJEU held that transfer pricing adjustments between related group companies does not automatically give rise to a VATable supply of services. For VAT to arise, there must be a direct link between an identifiable service supplied and the consideration received. Purely financial or accounting adjustments made to ensure a target profit margin are not, in themselves, subject to VAT. 

Background 

Stellantis Portugal S.A. (“Stellantis”), is a Portuguese company within the General Motors group. Stellantis operated as a distributor of motor vehicles acquired from group manufacturers and making onward sales to independent Portuguese dealers. It was the independent dealer, who sold the vehicles to the final customer.

Under the group’s Transfer Pricing (“TP”) policy agreed in 2004, Stellantis was required to achieve a specific operating margin for its distribution activities which was based on the sales price of the vehicles and corresponding costs. Preliminary vehicle prices were set, after which TP adjustments ensured that Stellantis achieved the agreed profit margin.  

A key element of the costs included repair costs due to defects and anomalies covered under warranty. The local Portuguese dealers carried out repair works for the customers who then invoiced Stellantis for such works (plus VAT) with Stellantis bearing all after-sales and operating costs. These costs were reported to the manufacturing entities, who then adjusted the sales price of vehicles to reflect the repair costs borne by Stellantis. These adjustments were documented by the issuance of credit or debit notes (excluding VAT).

Following an inspection, the Portuguese Tax Authorities (“PTA”) argued that the TP adjustments constituted consideration for services supplied by Stellantis to the manufacturing entities and should, therefore, be subject to VAT. As VAT had not been applied by Stellantis, the PTA took the view that a VAT underpayment of c.€1.5 million had arisen.

CJEU decision

The CJEU disagreed with the PTA and took the view that for a taxable supply to arise there should be a direct link between the supply of services and the consideration actually received by the taxable person. Such a direct link is established if there is;

1. A legal relationship between the service provider and the recipient pursuant to which there is reciprocal performance; and
2. Remuneration received by the provider of those services where the payment is neither voluntary, uncertain, or difficult to quantify.  

The CJEU determined that the objective of the 2004 agreement was to fix the TP of the vehicles and to guarantee that Stellantis obtained a specifically determined profit margin. The agreement did not mention that Stellantis was to provide repair services to the manufacturing entities in return for remuneration. As such, no direct link arises between the service and payment.

Practical implications

The judgement sheds further light on the interaction between transfer pricing adjustments and VAT, confirming;

• TP adjustments are not automatically subject to VAT;
• The VAT treatment depends on the underlying contractual agreements between the parties; and
• A taxable supply only arises where a payment can be directly linked to the service provided.  

As a result of the CJEU decision, we recommend businesses;

• Review the TP policies and consider whether TP adjustments are documented as price adjustments or service consideration.
• Identify any inter-group activity that may give rise to VAT exposure.
• Consider VAT and TP implications in tandem with respect to inter-group activities, particularly from a documentation perspective, to avoid unintended VAT/TP exposure. 

The interaction between VAT and TP has become increasingly complex for multinational groups. The recent CJEU judgments in Stellantis Portugal (C-603/24) as well as in Högkullen AB (C-808/23) and Arcomet Towercranes (C-726/23) provide guidance on intra-group services, year-end true-ups, and open market value adjustments.

The decisions reinforce that VAT and TP should not be considered in isolation. VAT is transaction-based and the treatment of each adjustment must be assessed on a case by case basis by reference to the facts, contractual arrangements, and economic reality, rather than the label attached to the adjustment.

Read our wider insight piece on the interaction between VAT and Transfer Pricing here. 

A recent determination from the Tax Appeals Commissioner ("TAC"), 65TACD2026, relates to an appeal made by an Irish company (“the Appellant”) against a Revenue determination where Revenue argued that the Appellant’s Relevant Contracts Tax (“RCT”) deduction rate should be 20%, rather than the 0% rate sought.  

The appeal centred on whether the Appellant, a newly incorporated entity, satisfied the conditions to qualify for the 0% RCT rate, in particular whether it had a three-year compliance history with Revenue.

The Appeal Commissioner (“the Commissioner”) determined that the Appellant was not entitled to the 0% RCT withholding rate on the basis that it could not demonstrate compliance with the statutory requirement to have met all tax obligations “throughout the previous three years” which is a key condition in demonstrating eligibility for the 0% rate. This was due both to its relatively recent incorporation and instances of late VAT filings. The appeal was therefore unsuccessful.

Background facts

RCT is a withholding tax regime applicable to payments by principal contractors to subcontractors in certain sectors (including construction). The applicable deduction rates are 0%, 20% (standard rate), or 35%, depending on the subcontractor’s compliance profile.  

The Appellant company was incorporated in 2024 and registered for Corporation Tax, RCT, and VAT from 1 June 2024. In December 2024, Revenue determined that the Appellant should be subject to the 20% RCT rate. The Appellant subsequently appealed this determination, seeking the 0% rate.

The Appellant argued that it had complied with all its tax obligations since incorporation and that the legislation does not explicitly require a company to have been in existence for three years in order to qualify for the 0% rate.  

The Appellant also contended that Revenue should exercise its discretion to grant the 0% rate, particularly given the cash flow impact of RCT deductions.  

Revenue maintained that the Appellant did not meet the conditions to qualify for the 0% rate, in particular the requirement to demonstrate full tax compliance over the previous three years. Revenue also highlighted that the Appellant had filed multiple VAT returns after their due dates.

TAC determination

The Commissioner found in favour of Revenue, concluding that the Appellant did not meet the requirements to qualify for the 0% RCT rate.

A key issue considered was the interpretation of the specific condition requiring that a subcontractor must fulfil all of its tax obligations throughout the previous three years. The Commissioner held that this provision, being an exemption to tax, must be interpreted strictly, and the relevant conditions within the legislation must be clearly satisfied.  

While acknowledging that the legislation does not explicitly require a company to have existed for three years, the Commissioner concluded that the provision nonetheless requires a three-year compliance record. As the Appellant had not been in existence for that period, it could not demonstrate the requisite level of compliance.  

In addition, the Commissioner found that the Appellant had submitted VAT returns late on eight occasions.

The Commissioner also considered whether it had jurisdiction to review Revenue’s discretion under Irish Tax law to concessionally allow the 0% RCT rate in specific circumstances. It concluded that it did not have such jurisdiction, as its role is limited to determining whether the statutory provisions were correctly applied. Any challenge to the exercise of Revenue’s discretion would need to be pursued by way of judicial review.

Practical implications

This determination highlights the strict approach adopted by Revenue in applying the conditions for access to the 0% RCT rate.

Key takeaways for taxpayers include:

• A three-year compliance record is critical - Even where not explicitly stated, subcontractors must be able to demonstrate a continuous three-year history of full tax compliance to qualify for the 0% rate. Newly established entities are unlikely to meet this condition in the early years of trading and are therefore likely to be subject to the standard RCT rate of 20%. It must also be noted that RCT rates can be as high as 35% particularly in cases of poor or no compliance history.
• Non-resident subcontractors – the three-year compliance record equally applies to non-resident subcontractors entering the Irish market. However, where a three-year compliance history in its local jurisdiction can be evidenced (and equally of its directors and shareholders), a non-resident subcontractor may be entitled to the 0% RCT rate by way of Revenue concession.  
• Cash flow considerations for new entrants – Newly-established subcontractors should therefore factor in the likelihood of being subject to the higher RCT rates (i.e. 20% and 35%) during the initial years of operation, with potential cash flow implications until a sufficient compliance track record over a period of three years is established.
• Timely compliance is essential - The requirement to comply with all tax obligations includes filing returns on time. Limited instances of late filing may preclude businesses from an entitlement to the 0% rate. Taxpayers cannot assume that late filings, even whereby a few days, will be overlooked by Revenue. It is therefore important to ensure that all applicable tax filing deadlines are met, and robust internal controls are in place to facilitate this.
• RCT reclaim – RCT withheld by Principal Contractors on payments to subcontractors may continue to be taken as a credit against the subcontractor’s Corporation Tax liability. Where a permanent establishment has not been triggered, periodic RCT refund claims may be sought. 

From 1 July 2026, a €3 customs duty will apply to low-value goods purchased online from non-EU countries, including the UK, where goods are shipped to consumers in Ireland or other EU Member States. The charge will apply per item or product type within a parcel, meaning mixed-product orders may attract multiple charges. Duty may be collected at checkout or on delivery and will generally be non-refundable unless goods are faulty. This change could increase costs for consumers and create operational, pricing and supply chain challenges for retailers, particularly those selling low-cost goods into the EU.

Read our full insight and practical implications here.

With effect from 1 July 2026, Ireland’s VAT rate for certain food-related hospitality services has been reduced from 13.5% to 9%.  

The reduced rate applies to restaurant and catering services, including taxable staff meals and hot takeaway food while accommodation remains subject to VAT at the first reduced rate, currently 13.5%.

For businesses which offer mixed supplies such as food and accommodation packages at a single price, the implications of the VAT rate change will particularly need to be considered to ensure continued compliance. Impacted businesses should also ensure the ERP system and internal controls have been updated for the VAT rate change, particularly where deposits or advance payments have been made. The impact on credit notes should also be considered.  

Please read our insight here for further detail on what this change means for your business.