The Arcomet Case

There has long been uncertainty on the application of VAT to transfer pricing (“TP”) related adjustments.  In particular, whether payments resulting from TP adjustments should be regarded as consideration for the supply of services or be viewed as falling outside the scope of VAT.

In this context, the 4 September  judgment of the CJEU in the Arcomet Towercranes case (C‑726/23) provides some helpful guidance.   

In the case, the court held that a year-end TP adjustment between affiliated companies designed to ensure that the pricing under a service agreement was arm’s length constituted consideration for a supply of services within the scope of VAT.   However, the court cautioned that determining the appropriate VAT treatment of TP adjustments needs to be done on a case-by-case basis and that much will depend on the contractual arrangement between the parties.   

Background

The case concerned an application for annulment to the CJEU of a Romanian administrative tax decision whereby SC Arcomet Towercranes SRL (“Arcomet Romania”) was ordered to pay additional VAT, penalties and interest for failing to account for reverse charge VAT on a TP related payment made by it to its affiliate, Arcomet Service NV Belgium (“Arcomet Belgium”), under an intercompany services agreement. 

The Arcomet group operates in the crane rental sector and under the service agreement Arcomet Belgium and Arcomet Romania agreed to exchange certain services.  Under the arrangement Arcomet Belgium sought suppliers for, and negotiated contractual terms on behalf of, Arcomet Romania. Arcomet Romania then entered the supplier contracts on its own behalf.  

A TP study was obtained which determined that Arcomet Romania should earn an operating profit margin between a certain range based on the transactional net margin method (“TNMM”) laid down in the OECD Transfer Pricing Guidelines (“TPG”).  Under the remuneration clause set out in the intercompany contract, the parties agreed that if Arcomet Romania’s operating profit margin was above the range in any given year Arcomet Belgium would issue an annual settlement invoice so as to bring Arcomet Romania back within the arm’s range.

From 2011 to 2013, Arcomet Romania’s operating profit margin was above the range.  In respect of each of those years Arcomet Belgium invoiced Arcomet Romania in accordance with the terms of their agreement and each invoice issued by Arcomet Belgium was exclusive of VAT. Arcomet Romania accounted for reverse charge VAT on the first two invoices but considered the third invoice to be in respect of a transaction that was outside the scope of VAT.

The Romanian tax authorities sought to recover VAT on the third invoice on the grounds that it related to the purchase of intra-Community supplies and refused VAT recovery on all three invoices on the basis that (i) the services invoiced for had not actually been supplied, and (ii) the services were not necessary for the purposes of Arcomet Romania’s taxable transactions.

Questions before the CJEU

The following questions were referred to the CJEU:

1) Do amounts invoiced between group companies to align profits based on the OECD’s TPG constitute a payment for services that falls within the scope of VAT?

2) If yes, can tax authorities request, in addition to the invoice, documents (for example activity reports etc.) to determine the purchaser’s right to deduct VAT?

CJEU’s judgments

Applicability of VAT to inter-company TP related payments

On the first question, the court ruled that the amount of the TP adjustments invoiced by Arcomet Belgium to Arcomet Romania could constitute consideration for a supply of services within the scope of VAT. In making this determination, the court noted that it is a settled principle of EU law that a supply of services for consideration is subject to VAT where there is a direct link between the service provided and the consideration received.

In the current case, the court held that such a direct link did exist between the service provided and consideration received. Arcomet Belgium had provided services to Arcomet Romania under the intercompany agreement and that link could not be affected by the remuneration arrangements laid down in the contract.  This was the case even where the amount due to Arcomet Belgium was calculated by reference to a TP report and required a balancing payment to be made at year end to ensure Arcomet Romania’s operating profit margin stayed within the range. 

The court also held that the fact that the consideration was variable and not guaranteed did not necessarily mean that there was no direct link between the service provided and the consideration received. The consideration in this case was not uncertain or voluntary but based on detailed rules and was to be calculated according to precise criteria.

Conditions for VAT recovery

On the second question, the court ruled that when assessing entitlement to VAT recovery, tax authorities may request documentary evidence that services are required for the taxpayer’s taxable transactions, but that the request must be necessary and proportionate.

The court stated that it was clear from case-law that a tax authority cannot refuse VAT recovery solely on the basis that an invoice does not satisfy formal conditions set out in domestic VAT legislation, if it has the necessary information to determine whether the substantive conditions for VAT recovery are satisfied. To satisfy the substantive conditions, a person must be a taxable person who receives goods or services from another taxable person for use in its own taxable transactions.

Significance of this Decision

The judgment of the CJEU provides helpful guidance on the factors that must be considered when determining if a payment made to operationalise a MNEs transfer pricing policy is within the scope of VAT.  In arriving at its ruling, the CJEU placed particular emphasis on the fact that the contract between the parties specifically provided for transfer pricing adjustments.  The case therefore highlights the importance of MNE’s considering the potential VAT implications of TP adjustments at the outset when drafting their intercompany agreements, particularly where those MNEs operate in sectors that are VAT exempt.  Given the facts of the case and the particular reliance placed by the CJEU on the terms of the contract, there may well be instances where TP adjustments could still fall outside the scope of VAT. 

It is advisable for MNEs to consult early with their transfer pricing and VAT advisors if contemplating putting in place intercompany arrangements whereunder TP adjustments are possible. 

For more information, please contact your usual A&L Goodbody Tax contact.

Date published: 13 October 2025