CJEU rules transfer pricing adjustments may be subject to VAT
CJEU rules transfer pricing adjustments may be subject to VAT
Affiliated entities are required to calculate their profits on the basis of the arm’s length principle, which means they must use commercial prices for corporate income tax purposes and these may give rise to transfer pricing adjustments. One question is whether such adjustments have VAT consequences. On 4 September 2025, the Court of Justice of the European Union released a decision on this issue (SC Arcomet Towercranes SRL (Case C-726/23)), concluding that these transfer pricing adjustments are subject to VAT, but does that also apply in your situation?
A transfer pricing study prepared in 2010 showed that the Romanian subsidiary should record a profit margin between -0.71% and 2.74% to comply with the transfer pricing rules. The parties subsequently concluded an agreement for the provision of mutual services, under which the Belgian parent company was responsible for commercial matters, such as strategy and planning, negotiating agreements with suppliers, and managing finances, the central administration of the vehicle fleet, and quality and safety management. The Romanian subsidiary was responsible for the sale and rental of cranes.
The agreement was based on the net transactional net margin method as set out in the OECD Transfer Pricing Guidelines, which aims to ensure that the profits made by the parties are consistent with the arm’s length principle. To this end, the agreement stipulated that if the profit margin exceeds 2.74%, the Belgian parent would issue an “equalizing” invoice for the excess amount to meet transfer pricing requirements. If the profit margin was lower than -0.71%, the Romanian subsidiary would issue an invoice to cover its loss. In 2011, 2012 and 2013, the Romanian subsidiary recorded an operating profit margin of more than 2.74% so the Belgian company sent invoices (exclusive of VAT) to the Romanian subsidiary.
The question before the Court of Justice is whether VAT is due on the amounts charged.
The CJEU pointed out that the Belgian company was contractually obliged to provide services. The Romanian subsidiary was obliged to pay an amount if its profit margin exceeded 2.74%. That amount is paid as consideration for the services provided by the Belgian parent company, enabling the company to achieve savings because the parent company negotiated with its suppliers.
The CJEU considered it irrelevant that the compensation was paid to ensure that the parties charged each other commercial prices and thus dealt with each other on arm's length terms. It also was irrelevant that the amount of the compensation was not determined in advance, nor was it established whether it would actually be paid as payment depended on the Romanian company’s profit margin. Despite these uncertainties, clear criteria had been agreed based on which the compensation could be calculated, which meant that the remuneration was variable, but not uncertain. The fact that a situation could arise in which the Belgian parent company had to pay remuneration to the Romanian subsidiary does not alter this conclusion.
Otherwise, even if a taxpayer is entitled to fully recover input VAT, it may be faced with interest and fines.
Facts of the case
The case before the CJEU involved a tax dispute between a Belgian parent company and its Romanian subsidiary, both parties members of a group of companies operating in the crane rental sector. The Romanian company buys or rents cranes, which it then sells or rents to its customers. The Belgian company obtains suppliers for its subsidiaries and negotiates contractual terms with them.A transfer pricing study prepared in 2010 showed that the Romanian subsidiary should record a profit margin between -0.71% and 2.74% to comply with the transfer pricing rules. The parties subsequently concluded an agreement for the provision of mutual services, under which the Belgian parent company was responsible for commercial matters, such as strategy and planning, negotiating agreements with suppliers, and managing finances, the central administration of the vehicle fleet, and quality and safety management. The Romanian subsidiary was responsible for the sale and rental of cranes.
The agreement was based on the net transactional net margin method as set out in the OECD Transfer Pricing Guidelines, which aims to ensure that the profits made by the parties are consistent with the arm’s length principle. To this end, the agreement stipulated that if the profit margin exceeds 2.74%, the Belgian parent would issue an “equalizing” invoice for the excess amount to meet transfer pricing requirements. If the profit margin was lower than -0.71%, the Romanian subsidiary would issue an invoice to cover its loss. In 2011, 2012 and 2013, the Romanian subsidiary recorded an operating profit margin of more than 2.74% so the Belgian company sent invoices (exclusive of VAT) to the Romanian subsidiary.
The question before the Court of Justice is whether VAT is due on the amounts charged.
VAT due on transfer pricing adjustment
The CJEU ruled that based on the facts and circumstances of the case, the transfer pricing adjustments made by the Belgian company to the Romanian subsidiary should be treated as consideration for a supply of services falling within the scope of VAT. Thus, VAT was due on the payment.The CJEU pointed out that the Belgian company was contractually obliged to provide services. The Romanian subsidiary was obliged to pay an amount if its profit margin exceeded 2.74%. That amount is paid as consideration for the services provided by the Belgian parent company, enabling the company to achieve savings because the parent company negotiated with its suppliers.
The CJEU considered it irrelevant that the compensation was paid to ensure that the parties charged each other commercial prices and thus dealt with each other on arm's length terms. It also was irrelevant that the amount of the compensation was not determined in advance, nor was it established whether it would actually be paid as payment depended on the Romanian company’s profit margin. Despite these uncertainties, clear criteria had been agreed based on which the compensation could be calculated, which meant that the remuneration was variable, but not uncertain. The fact that a situation could arise in which the Belgian parent company had to pay remuneration to the Romanian subsidiary does not alter this conclusion.
Impact for practice
The VAT treatment of transfer pricing adjustments between related parties has been a topic of discussion for some time in the EU. The CJEU adopted a case-by-case approach in reaching its decision in the case, which is understandable—the parties’ contractual obligations to provide services and make payments depending on the profitability levels were clearly set out and the court concluded that based on these facts there was sufficient evidence to demonstrate that the payments constituted consideration for the services received by the subsidiary, and hence were subject to VAT. This does not mean, however, that every transfer pricing adjustment will result in VAT liability. Potentially affected taxpayers should consider whether VAT is payable in their situations by carefully reviewing all intercompany agreements and focusing on any contractual terms relating to transfer pricing adjustments and whether there is sufficient documentation to support the taxpayer’s position.Otherwise, even if a taxpayer is entitled to fully recover input VAT, it may be faced with interest and fines.
