On 4 September 2025, the ECJ delivered its decision in the Arcomet case (C-726/23) following a request for preliminary ruling on whether intragroup remuneration adjustment for services, determined under the transfer pricing (“TP”) Transactional Net Margin Method (“TNMM”), is subject to VAT and whether tax authorities can subject the deduction right to the necessity of the services for taxpayer’s taxable transactions.
This judgment directly addresses how TP adjustments (specifically under the TNMM) interact with VAT rules and deduction rights, providing valuable guidance for taxpayers.
Facts of the case
SC Arcomet Towercranes SRL, a Romanian company (“Arcomet Romania”) engaged in reselling and sub renting cranes to its customers in Romania. In 2012, it entered into an agreement, effective since 2011, with its Belgian parent company, Arcomet Service NV Belgium (“Arcomet Belgium”). Arcomet Belgium provided finance, engineering, contract negotiation, crane fleet management, quality and safety management and bore the main economic risks associated with the activities of its subsidiary. Arcomet Romania had to purchase and hold all the goods necessary for the exercise of its activity and was responsible for the sale and rental of those goods and for the provision of services.
The remuneration was dependent on Arcomet Romania’s annual operating profit margin, which, according to a benchmarking study, had to be situated between -0.71% and 2.74%. Both parties had to mutually agree annually on the position of Arcomet Romania with respect to the range by applying the TNMM as provided by the OECD transfer pricing guidelines (“OECD TPG”). An operating margin outside of the range resulted in an annual settlement invoice issued, either by Arcomet Belgium or by Arcomet Romania, to maintain the latter within such range.
Such mechanism illustrates a typical intragroup “profit margin” adjustment under the TNMM, where a taxpayer is remunerated based on a targeted arm’s length profit margin.
For the years 2011, 2012 and 2013, Arcomet Romania’s operating margin exceeded the range which resulted in the issuance of an annual invoice by Arcomet Belgium. The invoice was exclusive of VAT and declared by the issuer as relating to supplies of service. On the other hand, Arcomet Romania declared the 2011 and 2012 as relating to intra-Community purchases of services, applied the reverse charge mechanism and deducted the related VAT. For the third invoice, the Romanian company considered the transaction as falling outside the scope of VAT.
The Romanian tax authorities disagreed with this treatment. First, they considered that the 2013 invoice was also within the scope of VAT as an intra-Community purchase of service. Second, they denied the deduction right as it had not been demonstrated that those services were supplied and were necessary for the purpose of taxable transactions.
Proceedings before the Romanian courts resulted in a request for preliminary ruling:
Question 1: Does the amount invoiced by the principal company to an associated operating company, equal to the amount necessary to align the operating company’s profit with the activities carried out and the risks assumed in accordance with the margin method of the OECD TPG, constitute a payment for a service which therefore falls within the scope of VAT?
Question 2: If the answer to the first question is in the affirmative, are the tax authorities entitled to require, in addition to the invoice, documents (for example, activity reports, [works] progress reports, and so forth) justifying the use of the services purchased for the purposes of the taxable person’s taxable transactions, or must that analysis of the right to deduct VAT be based solely on the direct link between purchase and supply or [between purchase and] the taxable person’s economic activity as a whole?
ECJ decision
On the first question, the ECJ found that the remuneration in respect of intra-group services, provided by a parent company to its subsidiary and contractually detailed, which is calculated in accordance with a method recommended by the OECD TPG and corresponding to part of the operating profit exceeding the predetermined threshold, constitutes consideration for a supply of services falling within the scope of VAT.
The Court reached this conclusion by identifying a “supply of services for consideration” as defined in its previous case law as (i) a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance and (ii) a direct link between the services and the consideration.
In addressing the taxpayer’s arguments, the Court added that (i) as the contract provided for detailed and precise rules, the remuneration was not to be considered as uncertain despite its variable nature, thus not affecting the direct link between the services and the remuneration, (ii) the existence of a supply of services for consideration is established based on all the circumstances characterising the transaction concerned including notably its economic and commercial reality and added that “transfer price is capable of constituting the actual consideration for a service supplied”. Regarding the reverse situation, of an equalisation payment by Arcomet Belgium to Arcomet Romania, the Court denied that such contractual provision affects the direct link between the supply of services and the remuneration received in the case at hand limiting its analysis to the question under review.
On the second question, the Court found that the tax authority can require from a taxable person seeking the deduction of input VAT to submit documents other than the invoice in order to prove the existence of the services referred to in that invoice and their use for the purposes of its taxed transactions, provided that the submission of that evidence is necessary and proportionate for that purpose.
Conclusion
The ECJ sheds some light on how TP adjustments fit within the VAT framework. According to the ECJ, TP adjustments can constitute “the actual consideration for a service supplied” and fall within the scope of VAT where relevant conditions are met.
In practice, where a transfer adjustment can be anticipated, it should be provided for contractually and connected to the relevant services. This connection should be made clear in the invoice and relevant documentation in order to avoid doubt.
Further developments can be expected from the currently pending case Stellantis Portugal case (C-603/24) dealing with TP adjustments under the transfer pricing profit split method.
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