VAT and transfer pricing adjustments: implications of the C-726/23 (Arcomet Towercranes) judgment

The decision, eagerly awaited not only by the Romanian business community but also across the European Union, offers a new perspective on the VAT treatment of such adjustments.

The CJEU clarified that such adjustments may fall within the scope of VAT when they reflect remuneration for identifiable services provided under a contractual framework. At the same time, the Court emphasised the importance of proper invoicing and the availability of supporting documentation to exercise the right to deduct VAT.

The background of the case is as follows: Arcomet Romania, part of the global Arcomet group and specialising in crane rentals, purchased or leased equipment which it subsequently resold or rented to its customers. Arcomet Belgium, the parent company, negotiated with suppliers and set the commercial terms, while contracts were concluded directly between Arcomet Romania and its clients.

A transfer pricing study conducted in 2010 indicated that the group’s subsidiaries should record an operating profit margin between –0.71% and 2.74%. To ensure compliance with this range, an agreement was concluded in 2012 between Arcomet Belgium and Arcomet Romania. Under the agreement, Belgium would issue an annual adjustment invoice to Romania if profits exceeded 2.74% or losses fell below -0.71%.

Between 2011 and 2013, Arcomet Romania recorded profits above the contractual threshold, and Arcomet Belgium issued three adjustment invoices without VAT. Arcomet Belgium treated these invoices as payments for services, while Arcomet Romania applied the reverse charge mechanism to the first two, considering them intra-Community acquisitions of services, but treated the third invoice as outside the scope of VAT. Following a tax audit, the Romanian authorities denied the right to deduct VAT, citing the absence of supporting documentation demonstrating the reality and necessity of the services. The dispute was subsequently brought before the courts.

The Bucharest Court of Appeal decided to stay the proceedings and referred two preliminary questions to the CJEU, which can be summarised as follows:

1. Whether transfer pricing adjustments between affiliated entities can be considered as consideration for services and, consequently, fall within the scope of VAT.
2. Whether, for the purpose of exercising the right to deduct, tax authorities are entitled to require supporting documentation beyond the mere existence of an invoice (e.g., activity reports, work statements, etc.) to demonstrate the reality and necessity of the services in connection with taxable transactions.

With regard to the first question, under the interpretation accepted until recently - developed notably in the CJEU’s judgment in Hamamatsu Photonics (C‑529/16) and in the working papers of the VAT Expert Group - transfer pricing adjustments were generally considered to fall outside the scope of VAT, provided they did not constitute consideration for specific supplies of goods or services. The focus was on the absence of a direct link between the adjustment and the original transactions, with such adjustments being regarded merely as mechanisms for aligning profits with market levels.

This approach was, however, nuanced in the Advocate General’s opinion in Arcomet Towercranes, which emphasised that the tax treatment must be assessed on a case-by-case basis, depending on the economic substance of the transaction. According to his view, adjustments that merely reflect a reallocation of profit without specific contractual obligations remain outside the scope of VAT. Conversely, adjustments that constitute remuneration for intra-group services, contractually agreed and linked to actual functions and risks assumed, must be treated as supplies of services subject to VAT.

The Court’s judgment, delivered in September 2025, endorsed and consolidated this interpretation. It confirmed that transfer pricing adjustments calculated under the Transactional Net Margin Method (TNMM) may fall within the scope of VAT when they reflect remuneration for services contractually undertaken by the parent company.

In addition, the Court emphasised that such adjustments cannot be regarded as arbitrary, as they are determined ex ante according to clear criteria, and highlighted that the active involvement of the parent company in managing subsidiaries distinguishes it from a mere passive holding. Furthermore, the Court clarified that the possibility of invoicing adjustments in both directions (from subsidiary to parent and vice versa) does not sever the direct link between the services rendered and the corresponding consideration.

In this context, reference should also be made to the CJEU’s judgment in Hogkullen (C-808/23), which held that intra-group services invoiced at a global price do not constitute a single supply; instead, each service must be assessed individually for VAT purposes.

Another essential element emerging from the Arcomet case is the importance of consistent treatment at group level across all jurisdictions involved. From a VAT perspective, the same transfer pricing adjustment must be treated consistently by both parties to avoid situations where, in one Member State, it is regarded as a mere profit adjustment while, in another, it is considered a supply of services.

Such misalignment may give rise not only to risks of double taxation or denial of deduction rights, but also to lengthy disputes with tax authorities. This inconsistency was precisely illustrated in the Arcomet case, where the Romanian and Belgian entities did not treat the adjustment invoices in the same manner.

As regards the second preliminary question, the Court remained consistent with its case law on the right to deduct VAT. It recalled that exercising this right requires compliance with substantive conditions, in particular that the goods or services are used for the taxable transactions of the taxable person. Consequently, tax authorities may require taxpayers to provide documentation in addition to the invoice, insofar as it is necessary to demonstrate the reality and necessity of the services.

However, the Court stressed that this prerogative must be exercised in accordance with the principle of proportionality. In other words, formal requirements must not undermine the right to deduct where the substantive conditions are satisfied, but neither do they relieve the taxpayer of the obligation to provide objective evidence of the actual supply and use of the services.

Therefore, since CJEU judgments are binding on tax authorities in all EU Member States, this decision marks a shift in the approach to evaluating transfer pricing adjustments for VAT purposes.

Another important aspect of the Arcomet case is that the adjustments were calculated using the TNMM method. At this stage, it remains uncertain whether the same reasoning would apply to other transfer pricing methods, such as the cost-plus method, the resale price method, the profit split method, or the comparable uncontrolled price (CUP) method.

Accordingly, it must be borne in mind that this judgment addresses a specific situation. In practice, different contractual arrangements and remuneration models may be agreed between parties, meaning that each case must be assessed individually to determine whether an adjustment constitutes a mere profit reallocation or, conversely, consideration for services falling within the scope of VAT.

In this context, we recommend that taxpayers making voluntary profit adjustments review their transfer pricing policies and supporting documentation from a VAT perspective to ensure that the tax treatment applied is valid and properly documented in the event of a tax audit. Following such a review, it may be confirmed that certain adjustments fall outside the scope of VAT, depending on the nature of the transaction, or that some adjustments relate to transactions within the scope of VAT, depending on their composition in terms of goods and/or services.