The VAT treatment of transfer pricing (“TP”)-adjustments has been a complex and often ambiguous area within EU tax law. The outcome of the Arcomet case set an important precedent for the VAT treatment of TP adjustments across the EU. This case follows the earlier opinion of the Advocate General, which already hinted at a VAT inclusive interpretation. Now, the CJEU has confirmed that non-transactional TP adjustments can indeed be subject to VAT, provided certain criteria are met.
The Arcomet case involved intra-group services whereby Arcomet Belgium, acting as the entrepreneurial principal, was responsible for strategic decision-making, financial management, commercial activities, and overall risk-taking, while Arcomet Romania handled the execution of the day-to-day sales and leasing of tower cranes to third-party customers.
Under their transfer pricing arrangement, Arcomet Romania was remunerated with a guaranteed operating margin for its activities. At year-end, a TP adjustment was made to ensure that Arcomet Romania’s actual margin is aligned with the guaranteed operating margin. Insofar the actual operating margin realised by Arcomet Romania exceeds the guaranteed margin, Arcomet Belgium issues an adjustment invoice to Arcomet Romania. Conversely, if the actual operating margin falls below the guaranteed operating margin, Arcomet Romania issues an adjustment invoice to Arcomet Belgium. This adjustment mechanism ensures that Arcomet Belgium, as the entity bearing the entrepreneurial risks, receives the residual profit or absorbs the residual loss whereas Arcomet Romania realizes a stable, routine operating margin.
Arcomet Romania undertook to pay Arcomet Belgium an amount corresponding to the portion of its operating profit margin exceeding the guaranteed operating margin. Arcomet Belgium issued invoices for 2011, 2012 and 2013. Arcomet Romania applied VAT under the reverse charge for the first two invoices. The third invoice was considered outside the scope of VAT.
The CJEU held that such payments must be regarded as consideration for a supply of services within the meaning of the VAT Directive and not merely as TP adjustments. It noted that a legal relationship clearly existed between the parent company and its subsidiary, giving rise to reciprocal obligations. The services provided by Arcomet Belgium conferred a direct and identifiable benefit on Arcomet Romania, improving its profitability and enabling efficiencies in its business operations. The remuneration was defined in advance under precise contractual terms and was neither voluntary nor uncertain, thereby preserving the necessary direct link between the services rendered and the payments made.
Furthermore, even where intercompany pricing mechanisms are designed to meet arm’s length standards, they may still constitute genuine consideration for VAT purposes when the underlying economic and commercial reality shows that services have been supplied. The CJEU also drew a distinction between passive holding companies, which do not engage in economic activity merely by acquiring or holding shares, and companies such as Arcomet Belgium, which actively participate in the management of their subsidiaries through the provision of services.
In conclusion, the CJEU ruled that remuneration determined as the portion of operating profit margin above the guaranteed margin qualifies as consideration for the supply of services and therefore falls within the scope of VAT.
The CJEU confirmed that tax authorities are entitled to request additional documentation to verify whether the services were used for taxable activities. However, such requests must be proportionate. The taxpayers are not required to demonstrate the necessity or economic appropriateness behind the decision to acquire the service.
The Arcomet judgment confirms that TP adjustments, insofar as applicable in the case at hand, can fall within the scope of VAT, provided they reflect genuine intercompany services and are supported by detailed documentation. Businesses must ensure that their TP policies and VAT treatment are aligned, especially when adjustments are made based on operating margins.
To safeguard VAT deduction rights, taxpayers should:
This ruling sets a precedent for increased scrutiny and highlights the importance of substance over form in intra-group transactions. Multinational groups should proactively review their TP and VAT frameworks to ensure compliance.
Based on a critical assumption, it remains to be seen whether TP adjustments that are made purely for the purpose of aligning taxable profits within a group, without any identifiable service provision or reciprocal performance between the parties, are to be regarded as falling within the application of VAT.
Authors : Tine Slaedts, Patrik Pashaj, Gert Vranckx, Stefanie Van der Straeten & Stijn Vastmans