ECJ on VAT treatment of transfer pricing adjustments

With its decision in the case SC Arcomet Towercranes(C-726/23) published on 4 September 2025, the ECJ takes a stance on VAT effects of transfer pricing adjustments (“TP adjustments”) for the first time.

Description

The SC Arcomet Towercranes SRL (subsidiary) is part of the Arcomet group. The Romanian subsidiary buys or rents cranes for selling or renting to its customers. The Belgian parent company provides various services to its subsidiary.

The parent company and the subsidiary agreed on a profit margin at arm’s length pursuant to the Transactional Net Margin Method (“TNNM”) based on a transfer pricing analysis.

As the profit margin of the Romanian subsidiary exceeded the standard range for the market, the Belgian parent company billed a compensation payment to the subsidiary, considering this as not subject to VAT. The Romanian authorities, however, considered the compensation payment as subject to VAT, while denying input VAT deduction to the Romanian subsidiary due to failure to allocate economic activity. Consequently, the Romanian court of appeal requested preliminary rulings by the ECJ on the questions listed below.

Questions submitted

• • • Is the compensation payment (TP adjustment) subject to VAT?

• • • If the TP adjustment is subject to VAT: Is the authority allowed to request further documents, next to an invoice, from the taxpayer in order to verify that the acquired services have been used for purposes of the taxable person’s taxable transactions, as evidence that the substantive requirements for input VAT deduction are met?

ECJ decision

Essentially, the ECJ agrees with Advocate-General de la Tour: TP adjustments calculated pursuant to a transfer pricing method recommended by the OECD are subject to VAT, if they are paid out as compensation for intra-group services rendered based on a legal framework under which services are mutually exchanged and thus a direct connection between service and compensation exists.

According to the ECJ, a compensation method such as the Transactional Net Margin Method, does not exclude a direct connection between the rendered service and the received compensation. Despite the compensation being variable, it is not uncertain within the meaning of the ECJ case law in the case Tolsma.

Also regarding the second question submitted, the ECJ agrees with the Advocate-General: Next to the invoice, other documents may be requested as evidence as well, if required and appropriate, e.g. evidence that the services have actually been rendered.

Implications in practice

According to current ECJ case law in the case Arcomet Towercranes, TP adjustments calculated pursuant to the Transactional Net Margin Method and which are directly connected to certain services based on contractual agreements, are subject to VAT.

In general, this corresponds to the interpretation of the Austrian tax authorities which deem subsequent TP adjustments subject to VAT (usually as adjustment of the assessment base pursuant to section 16 Austrian Value-Added Tax Act (UStG) (taking effect ex nunc; see no 522f TPG [VPR])).

VAT treatment of TP adjustments was already discussed several times in literature. Especially regarding year-end adjustments as lump-sum year-end adjustments, the issue of allocating the price adjustment to a single rendered service arises.

Referencing the recommendations of the VAT Expert Group (despite being non-binding), it is sometimes argued that TP adjustments are to be treated as non-taxable, if the parties involved are taxable persons fully entitled to input VAT deduction. In light of the current case law, it is doubtful whether this interpretation is still applicable.

The ECJ does not mention this implication in practice – a general allocation to the rendered services seems to suffice pursuant to the ECJ. However, it is still unclear how to proceed if the services are subject to different VAT rates. The criteria for such an allocation of a lump-sum TP adjustment remain unclear.

Conclusion

The ECJ partly clarifies the VAT treatment of TP adjustments with its decision in the case SC Arcomet Towercranes, however, some implications in practice remain unclear.

It remains to be seen how the ECJ’s course regarding VAT treatment of TP adjustments in the pending case Stellantis Portugal S.A. (C-603/24) will develop.