The recent CJEU decision in Arcomet provides binding guidance on the VAT treatment of TP adjustments on intragroup services calculated using an OECD-recommended method.
Background
The ambiguous relationship between VAT and transfer pricing is well-established, particularly regarding the VAT treatment of transfer pricing adjustments (TP Adjustments), as discussed in our previous newsflash.
On 4 September 2025, the Court of Justice of the EU (CJEU) released its decision in the Arcomet case (C-726/23), one of two recent references made in relation to TP issues (the other being C-808/23). This decision provides critical insights into the VAT implications of TP Adjustments. We outline below its key elements and their potential impact on businesses.
Facts
A Romanian crane rental company, part of an international group, entered into an agreement with its Belgian parent. According to this contract:
- the Belgian parent undertook to provide a certain number of commercial services and to bear the main economic risks associated with the activity of its Romanian subsidiary; and
- the Romanian subsidiary undertook to provide a certain number of services to its Belgian parent.
According to the contract, the parent company had to issue an annual settlement invoice if the operating profit margin of the Romanian subsidiary was greater than a certain threshold, in order to recover the excess profit of the Romanian subsidiary.
For several years, the Romanian subsidiary therefore had to pay an amount corresponding to the excess part of its operating profit margin.
The Romanian company applied VAT to this amount under the reverse charge mechanism, treating the payment as consideration for taxable services. However, the Romanian tax authorities denied the VAT deduction, arguing the adjustments were unrelated to taxable transactions.
The CJEU was asked whether the excess part of the operating profit margin (remuneration) constituted consideration for services for VAT purposes and what evidence was required to justify the recipient's right to deduct input VAT.
CJEU decision: TP Adjustment as consideration for supply of services for VAT purposes
The CJEU held that the remuneration calculated using a method (transaction net margin method or TNMM) recommended by the OECD's Transfer Pricing Guidelines for direct tax purposes constituted the consideration for a supply of services for VAT purposes based on the following conditions being met:
- Identifiable services – even though the
remuneration was intended as a TP Adjustment, the CJEU confirmed
that services were supplied by the Belgian parent to its Romanian
subsidiary since:
- the parent company was actively involved in the management of its subsidiary through a contract pursuant to which reciprocal services were provided;
- the reciprocal services performed under the contract, common in the context of intragroup relationships, corresponded to an activity with an economic and commercial reality.
- Direct link between the services performed and the remuneration received – the existence of a direct link was not affected by the remuneration arrangements laid down in the contract. Although the remuneration was in itself variable (inasmuch as it presupposed the existence of a positive operating profit margin), the detailed rules for that remuneration were laid down in advance in the contract. This implied that the remuneration was neither voluntary nor uncertain; nor was the amount thereof difficult to quantify. This position is in line with previous CJEU decisions.
VAT deduction right
Finally, the CJEU reiterated the basic conditions of the right to deduct input VAT and the corresponding burden of proof on taxable persons claiming it. In this context, the CJEU confirmed that tax authorities may require a taxable person seeking to deduct input VAT paid to submit documents other than the invoice to prove the existence of the services referred to in the invoice and their use for the purposes of the taxed transactions of that taxable person, provided the submission of that evidence is necessary and proportionate for that purpose.
Impact on VAT practices and open questions
This CJEU decision confirms that TP Adjustments based on a method approved by the OECD must be considered VAT taxable when they remunerate intragroup services effectively supplied between affiliated companies and are evidenced by a contract.
It therefore puts an end to the lack of binding guidance on the VAT treatment of TP Adjustments which has long created uncertainty for businesses. It also clarifies the (non-binding) position of the EU VAT Expert Group, according to which contracts defining TP Adjustments to reach guaranteed profit margins fell outside the scope of the VAT.
However, the decision also highlights more than ever that businesses need to:
- carefully assess their intragroup transactions; and
- ensure that intragroup transactions are properly documented to prove their taxable nature and support VAT deductions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
