Court of Justice clarifies VAT treatment of transfer pricing adjustments
The broader discussion about the relationship between Transfer Pricing (TP) and VAT has been going on for some time. Whereas TP looks at (a market-based) profit allocation at group level, VAT looks at individual transactions. In practice, these different perspectives lead to friction.
On 4 September 2025, the Court of Justice of the European Union rendered its judgment in Case C-726/23 (Arcomet Towercranes). The central question was whether TP adjustments should be regarded as a remuneration for VAT-taxable services and therefore fall within the scope of VAT.
In particular, adjustments between group companies have VAT effects as soon as there is a direct link between a TP adjustment/fee and goods or services actually supplied.
The facts
Arcomet Towercranes SRL (Arcomet RO), the Romanian subsidiary of the Belgian Arcomet Service NV (Arcomet BE), was subject to a tax audit for the years 2011-2014. The points of contention: three invoices issued following a TP study to align the profit margins within the group under the OECD guidelines.
Initially, Arcomet BE had declared those invoices in Belgium as intra-Community supplies of goods, subsequently corrected to intra-Community services. Arcomet RO applied the reverse charge mechanism to its first two issued invoices, while it considered that the third invoice fell outside the scope of VAT. As a result of the reverse charge mechanism, Arcomet RO was required to Romanian VAT on those invoices.
However, the Romanian tax authorities refused to deduct VAT on the part of Arcomet RO for the first two invoices, despite the fact that the Romanian VAT was declared as due. The Romanian tax authorities considered all invoices to be management services and requested additional evidence that the services had actually been performed and were necessary for Arcomet RO’s activities. The Romanian tax authorities followed the same reasoning for the third invoice, which would nevertheless bring it within the scope of VAT.
The questions referred to the Court
The Romanian court asks the Court for clarification:
- Whether TP adjustments that align profit margins in accordance with OECD Guidelines should be regarded as remuneration for a service subject to VAT?
- Whether in addition to an invoice, the tax authorities may require further evidence to prove that the purchased services have actually been used in the context of VAT-taxable activities?
TP fees may be subject to VAT
The Court confirms that the services provided by Arcomet BE, which were contractually agreed and for which the remuneration was calculated using the TNMM method, fall within the scope of VAT. The fact that the remuneration was variable does not alter this: according to the Court, there was a sufficiently direct link between the services provided and the remuneration. It was important that the method of calculating the compensation was contractually laid down in advance and that the payment was contractually binding and/or not entirely uncertain.
Conditions for VAT deduction
The Court confirms the principles of its previous case-law that the deduction of VAT is subject to both formal and material conditions.
- Formal: an invoice must in principle comply with the requirements of the VAT Directive, but minor defects should not be a reason to refuse deduction as long as the tax authorities have sufficient information to assess the material condition.
- Material: the taxable person must demonstrate that services have actually been supplied by another taxable person and that these are related to their own activities that fall within the scope of VAT.
The Court confirms the principle that the tax authorities may request additional evidence in order to assess whether the formal and substantive conditions of the right to deduct VAT are met, but that request for additional evidence must remain proportionate. It is important to note that the VAT deduction may not simply be refused because, according to the tax authorities, a purchased service would be “not necessary” for the purchasing company’s own activities. As usual, the burden of proof of the right to deduct VAT lies with the taxable person who wishes to exercise it.
What does this mean for your company group?
As soon as services are actually supplied within a group, VAT may be due. For companies, this means that they have to carefully structure their internal operations. In concrete terms, this means that:
- Intra-group contracts clearly define the services provided and how the remuneration is determined;
- Invoices contain sufficient details, with explicit reference to the intra-group contracts; and
- All supporting documents are carefully kept to substantiate the real nature of the services.
What can you do now?
The Arcomet Towercranes ruling highlights the importance of VAT aspects in your Transfer Pricing policy. The Court confirms that intra-group services can fall within the scope of VAT. For the VAT deduction, the tax authorities may ask for additional proof, but this must remain proportional.
The Belgian tax authorities are looking more and more critically at intra-group transactions, and only with conclusive documentation and well-substantiated intra-group transactions can your right to deduct VAT be effectively safeguarded.
Would you like to assess whether your current TP structure is sufficiently substantiated from a VAT perspective? Or would you like advice on the VAT treatment of intra-group transactions in light of this judgment?
Our specialists at Van Havermaet will be pleased to assist you.