UK and International Tax news

CJEU Judgment on VAT Implications of Transfer Pricing Adjustments

Wednesday 19th November 2025

The CJEU has recently issued its decision in an appeal concerning the VAT implications of certain transfer pricing adjustments.

In SC Arcomet Towercranes SRL [Case C-726/23], Arcomet Romania (AR) was part of the Arcomet Group which purchased and rented cranes for sale or rent to its customers in Romania. Arcomet Service NV Belgium (AB) sought suppliers for all its subsidiaries, including AR, and negotiated with those suppliers the contractual terms to be applied to its subsidiaries.

A transfer pricing study in respect of the relations between AB and its subsidiaries, carried out in December 2010, showed that the subsidiaries had to record, in accordance with transfer pricing rules, an operating profit margin of between ‑0.71% and 2.74%.

A contract was concluded between AB and AR, under which each party undertook to carry out a certain number of services for the other (the 2012 contract). AB undertook to assume the majority of the commercial responsibilities, including strategy and planning, negotiating contracts with third-party suppliers, negotiating the terms and conditions of financing contracts, engineering, finance, crane fleet management at central level, and quality and safety management. AB also bore the main economic risks associated with the activity of AR whilst AR undertook to purchase and hold all the goods necessary for the exercise of its activity and to be responsible for the sale and rental of those goods and related services.

The 2012 contract provided for remuneration to be determined by mutual agreement based on the transactional net margin method laid down in the OECD Guidelines. AB was entitled to receive remuneration from AR annually as set out in end of year invoices. AR would bear VAT relating to the remuneration received by AB in accordance with reverse charge provisions under Romanian tax legislation.

The annual settlement invoice issued by AB would recover operating profit margin earned by AR in excess of 2.74% or reimburse AR where the loss was less than ‑0.71%. No remuneration was due where the operating profit margin fell in the range ‑0.71% and 2.74%.  In 2011, 2012 and 2013, AR recorded an operating profit margin greater than the 2.74% as provided for in the 2012 contract. In respect of each of those years, AR was issued an invoice containing an amount exclusive of VAT by AB.

AR declared the first two invoices as relating to intra-Community purchases of services in respect of which it applied the reverse charge mechanism for the VAT due on those purchases, but considered that the third invoice had been issued for transactions falling outside the scope of VAT.

AR became subject of a tax inspection which included the years in which the three invoices were issued. Additional VAT on account of the deductions refused in respect of the invoices issued by AB, together with interest and penalties. The right of deduction was refused on the ground that AR had not demonstrated that the services invoiced had actually been supplied and that those services were necessary for the purposes of AR’s taxable transactions.

AR brought an action before the Regional Court in Bucharest for annulment of the decision rejecting its complaint against the report of the tax inspectors, the decision establishing additional VAT, and the corresponding interest and penalties. That court however dismissed the action by a ruling in March 2017.

The CJEU held that Article 2(1)(c) of the VAT Directive must be interpreted as meaning that the remuneration in respect of intra-group services, provided by a parent company to its subsidiary and contractually detailed, and which is calculated in accordance with a method recommended by the OECD Guidelines and corresponds to the part of the operating profit margin greater than 2.74% achieved by that subsidiary, constituted the consideration for a supply of services for consideration falling within the scope of VAT.

The Court also held that Articles 168 and 178 of the VAT Directive must be interpreted as not precluding the tax authority from requiring a taxable person who seeks the deduction of input VAT paid 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 the taxed transactions of that taxable person, provided that the submission of that evidence is necessary and proportionate for that purpose.

This is an important decision with regard to whether transfer pricing adjustments are VATable in which case relevant documentation should be made available to support the services being provided and the right to VAT recovery.

 

If you would like more information on the above, please contact Keith Rushen on 0207 486 2378.

 

Contact Us