ECJ Ruling Brings Clarity to VAT on Transfer Pricing Adjustments (Case C‑726/23, Arcomet Towercranes)

Key Update: ECJ Judgment of 4 September 2025

On 4 September 2025, the European Court of Justice delivered a highly anticipated judgment in SC Arcomet Towercranes SRL (Case C-726/23). In essence, the Court confirmed that a certain type of intra-group transfer pricing payment – here, profit-adjustment payments under a transactional net margin method (TNMM) agreement – qualifies as consideration for services and is subject to VAT.

This decision (following Advocate General Richard de la Tour’s April 2025 opinion) decisively answers a VAT question that had long left tax professionals “hypnotized” by its complexity. If you didn’t know, now you know – transfer pricing adjustments can indeed trigger VAT consequences under the right conditions.

Case Background: Arcomet’s Profit Adjustment Agreement and VAT Dispute

The case involves Arcomet Towercranes SRL, a Romanian subsidiary in a global crane rental group, and its Belgian head office (Arcomet Service NV). In 2010, a transfer pricing study determined that Arcomet’s subsidiaries should earn an operating profit margin between -0.71% and 2.74% to be at arm’s length. To enforce this, a 2012 intra-group agreement guaranteed the Romanian entity a profit within that range. Each year:

• If the subsidiary’s profit exceeded 2.74%, the Belgian head office would invoice the subsidiary for the excess, pulling the profit back in line.

• If profit fell below -0.71%, the subsidiary would invoice the head office for a compensating payment to cover the shortfall.

  
  

No payment was due if profits stayed in range. This setup effectively treated the parent as providing strategic and commercial services (and assuming most risks) for the subsidiary, with year-end “true-up” invoices reallocating profits to arm’s-length levels.

In 2011–2013, Arcomet Romania’s profits overshot the range, so the Belgian parent issued three annual invoices to “collect” the extra profit. The Romanian company initially treated the first two invoices as intra-Community service fees (applying reverse-charge VAT) but, tellingly, treated the third invoice as outside the scope of VAT – perhaps hoping to avoid a VAT hit.

However, after a tax inspection, the Romanian authorities cried “mo’ money, mo’ problems”: they denied Arcomet’s VAT deductions on these payments, reasoning that the company failed to prove any actual services or business necessity behind the charges (no supporting documents were provided). The tax auditors reclassified the third invoice as taxable, imposed additional VAT, interest, and penalties, and refused input VAT credit on all three years. Arcomet Romania challenged this in court, leading the Bucharest Court of Appeal to seek guidance from the ECJ.

Legal Questions Referred to the ECJ

The Romanian court’s referral zeroed in on two fundamental questions about the intersection of transfer pricing and VAT:

1. Are transfer pricing “true-up” payments consideration for a service (and thus within VAT’s scope)? In other words, when a parent company invoices a subsidiary to align its profit with an arm’s-length range (per OECD guidelines), is that payment deemed payment for a service under Article 2(1)(c) of the VAT Directive, making it a taxable supply?

2. What evidence is required for VAT deduction on such payments? If the answer to #1 is yes, can tax authorities demand documentation beyond just an invoice (e.g. reports or agreements) to prove the services were used for the subsidiary’s taxable outputs? Or must the right to deduct be assessed solely by the normal “direct link” test between the cost and the taxable business activities?

   
   

These questions highlight a classic VAT dilemma for multinationals: Does a transfer pricing adjustment equate to a service provided, and how much paperwork does a company need to defend its VAT deduction?

The ECJ’s Judgment: Transfer Pricing Payment = Taxable Service

In its 4 September 2025 judgment, the ECJ agreed with the AG's opinion that Arcomet’s profit adjustment payments amounted to consideration for a service – making them taxable supplies under the VAT Directive. The Court applied classic VAT principles to cut through the accounting labels. It found a “reciprocal performance” relationship: the parent provided real services (commercial strategy, supplier negotiations, risk management) and in return the subsidiary paid a fee if its profit exceeded the agreed cap. That fee wasn’t arbitrary or voluntary – it was calculated by precise contractual criteria and directly tied to the services’ outcome (keeping the subsidiary’s profit in check).

The ECJ emphasized economic reality: despite being set via transfer pricing rules, these payments conferred a clear benefit to the subsidiary (access to the parent’s resources, cost savings, improved operations) in exchange for part of its profit. Thus, there was a direct link between the services and the remuneration, satisfying the core test for a taxable service.

Crucially, the Court distinguished this scenario from a mere passive ownership situation. Here the parent wasn’t just a holding company doing nothing; it actively assumed economic risks and performed services for the subsidiary. The profit-based variability of the fee didn’t matter – a formula-based price is still a price, and it was agreed in advance. In VAT terms, Arcomet’s arrangement was not just an internal finance exercise; it was a service agreement with a contingent fee. Therefore, Article 2(1)(c) applies: the excess profit payment is subject to VAT. In plainer terms, the ECJ is saying: “more money, more problems” indeed – extra profit paid over in a group context does bring a VAT obligation, at least when it’s linked to services rendered.

The Documentation Question: Invoices, Evidence, and Proportionality

On the second question, the ECJ struck a balance between taxpayer rights and tax authority powers. VAT deduction requires both a valid invoice and proof that the purchase relates to taxable activities. Arcomet’s invoices lacked detail, but the Court stressed that input VAT cannot be denied solely for formal defects if the underlying facts can be shown.

Authorities may therefore request proportionate evidence beyond invoices—such as contracts or reports—to confirm that services were supplied and used. Crucially, they cannot demand proof that services were “necessary” or “profitable,” only that they were tied to taxable operations. The burden remains on the taxpayer, and with sparse invoices, additional documentation is justified. The lesson: invoices start the process, but substance must back them up—so keep your paperwork “sicker than your average.”

Practical Implications

This judgment provides long-awaited clarity at the crossroads of VAT and transfer pricing. Here are the key implications in practice:

• TP Adjustments Can Be VATable: The ECJ confirms that intra-group payments arising from transfer pricing mechanisms can fall within VAT scope when they effectively compensate for services between related entities. Businesses can no longer assume that a year-end transfer pricing true-up is invisible to VAT. Each arrangement must be examined: if there’s a service (even an implicit one) behind the payment, expect VAT to apply.

• Mostly Neutral for Fully Taxable Businesses: For groups where both entities are fully taxable and in different EU countries, the VAT on such adjustments often washes out under the reverse charge mechanism. The subsidiary self-accounts for VAT and (if it has full deduction right) claims it back in the same return. In those cases, this ruling doesn’t create additional tax cost – it’s more about compliance (invoicing and reporting). However, industries with limited VAT recovery (banks, insurers, real estate, etc.) could face a real cost.

• Documentation is King (Again): The Court’s stance on evidence rings a familiar bell in VAT compliance. Companies must maintain VAT-compliant invoices and supporting documentation for intercompany charges. If the invoice for a TP adjustment isn’t clear, be prepared with other proof of the service provided (e.g. service agreements, correspondence, work outputs). Tax authorities have the green light to ask for “necessary and proportionate” documentation to verify your VAT deduction.

• Consistency in Treatment: Arcomet’s case also teaches that consistent VAT treatment of TP adjustments is crucial. The Romanian entity’s switch from treating two invoices as taxable to the third as outside scope likely drew the auditors’ attention. Going forward, businesses should apply a coherent policy: if a TP adjustment arrangement is deemed a service in year 1, treat similar payments the same way in year 2 (unless the underlying facts changed).

  
  

Future Outlook

While the ECJ has brought important clarity, it stopped short of addressing every scenario. The judgment is explicitly limited to cases where the national court can verify that a service was supplied, which means not all transfer pricing adjustments will automatically fall within VAT. Questions remain around situations where an adjustment is imposed retroactively by a tax authority audit with no prior contract or discernible service. In such cases, one could argue that a simple reallocation of profit, absent any benefit conferred, might fall outside VAT – but this remains unresolved.