Context
The Romanian tax inspectors argued that the invoices reflected management services provided by Arcomet BE to Arcomet RO. They requested supporting evidence showing that services had in fact been performed and were necessary for Arcomet RO’s taxable activities. Information exchanged via VIES confirmed that the Belgian authorities also qualified the invoices as services.
The Court dismissed this by pointing to the contractual mechanism and the fact that no losses had occurred in practice. But that does not remove the uncertainty: the calculation method was predictable, the existence of payment was not. The Court’s reliance on the fact that margins turned out positive each year reads more as pragmatic reasoning than a consistent application of principle.
The interaction between TP adjustments and VAT is complex, mainly because Transfer Pricing addresses profits at the level of the enterprise, while VAT applies to individual transactions.
To fall within the scope of VAT, there must be a direct link between consideration and the goods or services supplied.
Where the price of goods or services is adjusted, VAT consequences may arise. For example, in World Comm Trading the CJEU ruled that price adjustments must be fully detailed and properly reported for VAT purposes (CJEU, 28 May 2020, C-684/18, World Comm Trading).
Where the price of goods or services is adjusted, VAT consequences may arise. For example, in World Comm Trading the CJEU ruled that price adjustments must be fully detailed and properly reported for VAT purposes (CJEU, 28 May 2020, C-684/18, World Comm Trading).
The current case concerned TP adjustments aligning the profits of a subsidiary, under the transactional net margin method (TNMM) of the OECD Transfer Pricing Guidelines, with the functions performed and risks assumed.
Facts
SC Arcomet Towercranes SRL (“Arcomet RO”) is part of the international Arcomet group and specialises in the rental and sale of tower cranes. For the period 2011–2014, Arcomet RO underwent a Romanian tax audit. The dispute focused on three transfer pricing invoices issued by the Belgian parent, Arcomet Service NV (“Arcomet BE”). These invoices resulted from a transfer pricing study by an advisory firm designed to align group margins with the OECD Guidelines.
Initially, Arcomet BE reported the invoices in its Belgian VAT return as intra-Community supplies of goods. In 2015, it corrected this to “services”. Arcomet RO, in turn, reported invoices 1 and 2 (2012) as services and applied the reverse charge. Invoice 3 (2013) was not reported, as Arcomet RO considered it outside the scope of VAT.
The Romanian tax inspectors argued that the invoices reflected management services provided by Arcomet BE to Arcomet RO. They requested supporting evidence showing that services had in fact been performed and were necessary for Arcomet RO’s taxable activities. Information exchanged via VIES confirmed that the Belgian authorities also qualified the invoices as services.
For invoices 1 and 2, the inspectors denied input VAT deduction, even though Arcomet RO had applied and paid VAT under the reverse charge. Their reasoning: no proof of services rendered, and no necessity for taxable activities. For invoice 3 they applied the same approach: VAT was assessed but deduction denied. Strikingly, the Romanian tax authorities thus recognised the existence of a service, yet still refused deduction, while national law appeared to require only the existence of an invoice as a formal condition.
Arcomet RO challenged the assessments. During the appeal, the Curtea de Apel București referred preliminary questions to the CJEU.
Preliminary questions
The Romanian court asked the CJEU to clarify Article 2(1)(c) and Articles 168 and 178 of the VAT Directive 2006/112/EC. Specifically:
1. Should TP adjustments between associated enterprises, intended to align the profit of a subsidiary with the functions performed and risks assumed under the OECD Guidelines, be regarded as consideration for a service subject to VAT?
2. May the tax administration require additional documentation, beyond the invoice, to prove that acquired services were actually used for taxable activities?
Judgment
Is VAT applicable on the TP settlements?
The CJEU confirmed that the services provided by Arcomet BE to its Romanian subsidiary, clearly set out in the contract, fall within the scope of VAT. The remuneration was determined under the TNMM, with the operating margin above 2.74% skimmed annually in favour of the Belgian entity. The Court held that this constituted a service for consideration, as there was a direct link between the management and operational services provided and the remuneration received. The fact that the remuneration was variable and dependent on the subsidiary’s margin did not break that link. What mattered was that the calculation method was contractually fixed in advance and the payment was neither gratuitous nor aleatory.
The Court made convenient use of its earlier case law on holding companies that merely hold shares passively. Passive shareholding does not constitute an economic activity for VAT purposes. By contrast, where a parent actively involves itself in the management of its subsidiary through genuine management or operational services, the remuneration is in principle a taxable supply. For Arcomet, this means that the annual TNMM adjustment qualifies as consideration for VAT-taxable intra-group services.
What conditions apply for input VAT deduction?
The Court then addressed input VAT deduction, distinguishing between form and substance. Formally, an invoice meeting the VAT Directive’s requirements is necessary. However, deduction cannot be refused solely because an invoice contains formal defects. As long as the tax authority has sufficient information to verify the substantive conditions, such defects are not decisive.
Substantively, the taxable person must demonstrate that services were actually supplied by another taxable person and used for its own taxable activities. The Court underlined that assessing economic necessity or profitability is not a separate condition for deduction. In other words, the tax authorities may not refuse deduction on the ground that a service was “unnecessary”, as long as it was real and linked to taxable activities.
That said, the Court acknowledged that the tax authorities may request further evidence to prove the reality and use of the services, such as reports, internal notes or correspondence. Such requirements must be proportionate and limited to what is necessary to verify the substantive conditions. The burden of proof ultimately lies with the taxable person claiming the deduction.
Some critical observations
The judgment provides clarity, but also raises questions.
In VAT, remuneration may vary in amount but must not be uncertain in existence. This is where Arcomet is problematic: remuneration applied only if the subsidiary’s margin exceeded 2.74%, while if it was lower, the parent had to pay the subsidiary. Thus, it was not certain upfront whether a payment would be made, or in which direction. This closely resembles Baštová (C-432/15), where remuneration also depended on an uncertain event.
The Court dismissed this by pointing to the contractual mechanism and the fact that no losses had occurred in practice. But that does not remove the uncertainty: the calculation method was predictable, the existence of payment was not. The Court’s reliance on the fact that margins turned out positive each year reads more as pragmatic reasoning than a consistent application of principle.
The broader picture suggests that the Court primarily sought to avoid TP adjustments being systematically excluded from VAT. Where genuine intra-group services are provided, the corresponding TP settlement should also fall under VAT. This provides practical clarity but sits uneasily with the strict VAT doctrine on the certainty of remuneration. The debate is therefore far from settled.
Conclusion
The Court followed the Advocate General and confirmed that intra-group services supplied by a parent, remunerated via a transfer pricing (TP) settlement, are VAT-taxable transactions. A TNMM adjustment, contractually agreed and covering genuine services, falls within the scope of VAT. For deduction, tax administrations may request additional evidence, provided this is proportionate and necessary. Purely formal invoice defects are not sufficient grounds to deny deduction where the substantive conditions are met.
The ruling brings clarity on several key points, but also leaves questions unresolved, particularly around the certainty of remuneration and the interaction between TP and VAT. For businesses, this is the moment to review their TP policies and the VAT treatment of intra-group services. Are contracts clear on the nature of the services and the method of remuneration? Are invoices sufficiently detailed, and is supporting documentation available to substantiate input VAT deduction? Where gaps or risks exist, timely adjustments and stronger documentation are advisable.