SC Arcomet Towercranes SRL - Transfer pricing adjustments can fall within the scope of VAT

This article was originally published in the Tax Journal, September 2025 and is reproduced with permission from the publisher.

In SC Arcomet Towercranes SRL (Case C-726/23) (4 September), the CJEU found that transfer pricing adjustments can fall within the scope of VAT if there is a direct link between the services provided and the compensation received.

This case looked at the VAT implications of transfer pricing arrangements between a Belgian parent company and its Romanian subsidiary. The Romanian entity, SC Arcomet Towercranes SRL (Arcomet Romania), acquired cranes for sale or lease to customers. Its parent company (Arcomet Belgium) provided various aspects of commercial support.

In 2010, a transfer pricing study was carried out, setting a margin range for Arcomet Romania. When the profit margin exceeded this range, Arcomet Belgium issued an invoice to adjust the margins and adhere to the transfer pricing agreements. Three invoices were raised in total, two of which were subject to the reverse charge by Arcomet Romania; however, the third invoice was treated as outside the scope of VAT.

The Romanian tax authorities disputed this treatment and argued that all three invoices should have been subject to the reverse charge, but with no right to deduct input VAT as there was a lack of evidence as to the nature or necessity of the services rendered by Arcomet Belgium.

The CJEU held that, for VAT purposes, remuneration for intra-group services by a parent company to its subsidiary in line with transfer pricing guidelines, ‘must be interpreted as meaning that remuneration for intra-group services supplied by a parent company, that assumes the commercial responsibilities, to a subsidiary and set out contractually, which is calculated according to the transactional net margin method recommended by the OECD Guidelines, must be regarded as the consideration for a supply of services for consideration within the meaning of that provision and must be subject to VAT’.

In other words, it held that there was a direct link between the services provided and the compensation received, and thus the services rendered by Arcomet Belgium constituted taxable supplies.

It was noted that the chosen transfer pricing method is irrelevant to the VAT position; what matters is that there is a service provided, and a payment received. It was also noted that although the amount of remuneration agreed in the contract was variable, it was not sufficiently uncertain or difficult to quantify to fall outside the scope of VAT.

The CJEU rejected the arguments of Romanian tax authority that Arcomet Romania had to demonstrate that the services were necessary or appropriate. It did, however, state the authorities could request additional documentation beyond VAT invoices to support the right to VAT recovery, provided such documents requested are proportionate and used to prove the existence of services in question.

Why it matters: This is an important decision that calls into question the VAT implications of transfer pricing adjustments, as it increases the risk that tax authorities may view transfer pricing adjustments as VAT-able payments. It is essential that businesses review intra-group agreements and existing transfer pricing adjustments in order to identify existing risk areas and potential measures to mitigate the risk of tax authority investigations.

Richard Woolich, Partner at DLA Piper UK, observed that although the invoices in this case did not specify the nature of the services, the court nevertheless found a sufficient link between the Belgian parent’s strategic and management activities and the amounts charged. He noted that the court referred to Larentia & Minerva (Case C-108/14), drawing the parallel that the Belgian parent was receiving the payment to actively manage its subsidiary, and relied on Bastova (Case C-432/15) and its finding that the consideration was not gratuitous, uncertain or too difficult to quantify. Woolich also pointed out that the EC’s VAT Committee, in Working Paper 923, had already recognised the tension between transfer pricing and VAT, and had advised that the VAT treatment of transfer pricing adjustments should be assessed on a case-by-case basis.

‘The case shows the importance of the contract in evidencing services’, Woolich said. Where services are specified, a court will presume that a payment made is linked to those services, taking into account economic and commercial reality, in the absence of contrary evidence. It does not matter if the payment also represents a transfer pricing adjustment; that does not detract the payment being directly linked to services. And it does not matter if in some years the same services will be performed but no payment made, or the payment goes the other way, due to the transfer pricing methodology. In principle, it does not matter which transfer pricing method is used; the issue is whether there is a payment linked to underlying service. That said, mere tax adjustments, where a party amends its tax return without making a payment to another company, would be outside the scope of VAT’.

Woolich added: ‘The case casts a spotlight on the importance of contract drafting, and having a tax adviser review intra-group agreements with a VAT hat, and the significance of the wording on the invoice. Here, the invoice was defective in form as it did not specify the nature of the services, the human and material resources used, the hours worked, etc. The Romanian tax authority therefore challenged the input tax deduction. The court held that it was proper for the Romanian tax authority to call for additional evidence to verify what services had been received as a matter of substance, and to check those services had been used in downstream taxable transactions. Calling for additional documentation was consistent with the principle of proportionality. The lesson is clear: to avoid input tax enquiries, taxpayers should ensure suppliers include sufficient detail on the invoice’.

Joe Sturge, Director, and Tamirlan Rustamov, Associate, at RSM UK, said the decision also raised interesting questions regarding HMRC’s policy on contingent consideration: ‘A UK holding company must evidence that is has economic activity to reclaim VAT. However, HMRC’s interpretation of UK case law is that contingent consideration does not create such activity. Nevertheless, in this case, the court’s decision implies that provided "remuneration is neither voluntary nor uncertain", it does create an economic activity’.

‘There are two key takeaways from this decision’, they said. ‘Taxpayers must be able to evidence the detail of intra-group charges. This evidence should include a contract identifying specific services for a clearly defined fee. Additionally, HMRC policy concerning holding company VAT recovery might be seen as too restrictive’.