Tax Law Flash Update
The European Court of justice (ECJ) has ruled on the interaction between transfer pricing adjustments for corporate tax purposes and their impact on VAT.
Referred by a Romanian court, the ECJ was asked to consider the treatment, for VAT purposes, of transfer pricing adjustments that, in the pending case, resulted in the issuance by a Belgian parent company of invoices related to services provided to its subsidiary established in Romania.
In the case at hand, the adjustments were determined according to the transactional net margin method recommended by OECD principles.
The Court was asked whether such adjustments are subject to VAT and, if so, what evidence the tax authorities may require from the subsidiary to validate its right to deduct the VAT due on these services under the reverse charge mechanism.
As a reminder, the ECJ had previously examined this question but only in the context of customs duties and in cases of merchandise price adjustments (CJEU, Case C-529/16, Hamamatsu Photonics Deutschland GmbH, 20 December 2017).
In the absence of any specific provision regarding the potential VAT implications of such adjustments, the VAT Committee had considered that this issue must be addressed on a case-by-case basis and did not follow up on the proposals made by its VAT Expert Group, which primarily aimed to simplify matters by excluding VAT on such adjustments where both parties are fully entitled to recover input VAT, thereby avoiding divergent interpretations.
1. On the existence of a VAT-taxable supply of services
The Court confirms, as suggested by the Advocate General in his Opinion of 3 April 2025, that the VAT treatment of such adjustments must be assessed on a case-by-case basis.
A service is considered to be supplied for consideration (and therefore subject to VAT) only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the actual consideration for an identifiable service supplied to the recipient. That is the case if there is a direct link between the service supplied and the consideration received (VAT Directive, Article 2 (1)(c)).
In this case, the Court raises that the adjustments at stake arose from an agreement between the two parties under which the Belgian parent company Arcomet Belgium committed to provide a range of commercial services and to bear the main economic risks of its Romanian subsidiary, which in return undertook to pay each year an amount corresponding, where applicable, to the portion of its operating margin exceeding 2.74%.
The Court states that these factors characterize the existence of a VAT-taxable supply of services, without the following circumstances having any impact:
- the terms of the agreement were set to comply with the arm’s length principle in accordance with OECD-recommended methods for direct taxation;
- the remuneration may be uncertain or variable.
We can regret, however, that the Court, like the Advocate General, avoids addressing the potential VAT implications of adjustments in favor of the subsidiary rather than as a charge, which raises complex questions regarding the characterization of the remuneration received by the subsidiary under the same agreement.
2. On substantiating the right to deduct VAT on the services
As far as the relationship between the parent company and its subsidiary qualify for a VAT-taxable supply of services, the Court provides guidance on supporting the subsidiary’s right to deduct input VAT.
The Court recalls, based on its established case law, that the taxable person claiming a VAT deduction must justify it, and that the tax authorities were entitled to require Arcomet Romania to prove that the invoiced services were actually supplied and used for its own taxable operations.
These proofs may include documents held by the service provider (the parent company), but they must be necessary and proportionate for assessing whether the material conditions for the deduction are met.
The Court’s analysis is in line with the standard mechanisms of the VAT system. It requires the concerned corporate groups, when determining adjustments under their transfer pricing policies, to pay particular attention to the VAT treatment of these financial flows, ensuring it is consistent with applicable VAT rules.
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CJEU, Case C-726/23, Judgment of 4 September 2025, SC Arcomet Towercranes SRL
