Court Clarifies Link between Transfer Pricing Adjustments and VAT

The Court of Justice of the European Union (“CJEU") delivered a judgment on September 4, 2025, in the case of Arcomet Towercranes (C-726/23), concerning VAT treatment in relation to transfer pricing adjustments. According to the court, the compensation paid in the case should be considered payment for services rendered, as there is a direct link between the services provided and the compensation paid. The court also established that tax authorities may request additional documents other than the invoice to substantiate the right to deduct input VAT.

The background of the case was that the Romanian subsidiary, which sells or rents cranes, had received services from its Belgian parent company, including assistance in negotiating contracts with suppliers and strategic advice. The compensation to the parent company was based on the subsidiary’s results and calculated according to the transactional net margin method, which is regulated in the OECD’s transfer pricing guidelines. Compensation for the services would only be paid if the Romanian subsidiary’s operating margin exceeded 2.74 percent. If the operating margin was within a range of -0.71 percent to 2.74 percent, the parent company would not be compensated for the services. If the operating margin fell below -0.71 percent, the subsidiary would instead issue a transfer pricing adjustment invoice to the parent company. 

The questions addressed by the court were as follows: whether the compensation invoiced to the Romanian subsidiary to achieve a certain operating result should be regarded as consideration for the services provided, and whether tax authorities can require documents other than the invoice to substantiate the right to deduct VAT. 

The CJEU found that the compensation paid by the Romanian company to the Belgian company should be considered payment for the services provided, as there is a direct link between the services rendered and the compensation paid by the subsidiary. The compensation is therefore subject to VAT according to the court. 

According to the CJEU, it was irrelevant in this case that the amount and existence of the compensation were based on the Group’s transfer pricing adjustment agreements. Even if the payment for the services goes in the opposite direction, the link between the provision of services and the payment remains. However, this must be assessed on a case-by-case basis. 

Regarding the second question, the CJEU stated that the right to deduct input VAT requires the service recipient/buyer to be able to show that services have been provided and that these services have been used for its taxable transactions in order for the right of deduction to exist. This means that the tax authority has the right to require supporting documents other than the invoice to prove that the services have actually been provided and used for the company’s taxable transactions. 

Comments 

The CJEU’s ruling means that compensation calculated using the transactional net margin method falls within the scope of VAT if there is a direct link to a provided service. Thus, invoicing for transfer pricing adjustments is also covered in cases where a subsidiary is to achieve a certain operating result. However, an assessment must be made in each individual case. 

Our interpretation is that the CJEU’s judgment largely aligns with the guidelines previously issued by the Swedish Tax Agency in this area. What is particularly interesting, however, is the court’s statement that even if the opposite scenario had occurred - i.e., if the subsidiary’s result was so low that the parent company, due to the transfer pricing model, had to pay compensation to the subsidiary - the link remains. What this means for practical use is difficult to know. 

It can be noted that the circumstances in the case do not fully align with how we often see global groups act in practice. Usually, there is a provision of goods and services for which compensation is paid. The problem that arises is whether an adjustment made in accordance with the transfer pricing rules should affect the price of these, to be seen as something not covered by the scope of VAT, or to be regarded as compensation for a new service. One interpretation could be that the CJEU, through its statement, considers that the link between the parent company and the subsidiary is not broken in a situation where the parent company must compensate the subsidiary, but it is the subsidiary that in such a case is compensated for having provided a service in the form of continuing to operate in accordance with the parent company’s instructions. 

The judgment emphasizes the importance of reviewing intra-group service agreements and their VAT treatment from the outset. Companies should ensure that their transfer pricing models are properly documented, not only for income tax purposes but also with regard to VAT implications. The judgment also confirms that tax authorities can require documents other than invoices to support VAT deductions, provided this is necessary and proportionate with the purpose, i.e., to substantiate the right to deduct input VAT. Companies should therefore ensure that they have robust supporting documentation that clearly shows both the existence of the services and their use for taxable transactions. 

It can be stated, however, that this remains an area that raises many questions, and it is very difficult for companies to determine the appropriate approach. Hopefully, this judgment can inspire continued dialogue that can help companies understand what constitutes the appropriate approach in light of both income tax and VAT regulations.