Key takeaways

• In the decision SC Arcomet Towercranes SRL, the existence of an agreement between two related parties — with a clear description of the services rendered to each other and remunerated according to a methodology included in a transfer pricing report — was key to the CJEU's interpretation.
• The outcome is in line with the opinion given by the advocate general on 3 April 2025: transfer pricing adjustments may be regarded as falling within the scope of VAT depending on the circumstances of each specific situation, to the extent that there is a direct link between the service and the consideration.
• This decision is especially relevant for businesses not benefitting from a full input VAT deduction right, such as those operating in the Luxembourg financial and real estate sectors.
• Documentation and communication between the VAT and transfer pricing teams in multinational groups are critical. To avoid VAT leakages, intercompany agreements should properly describe the type of services supplied and the consideration exchanged, bringing the direct link out. Some transfer pricing adjustments do not identify services actually received.
• It is also key that invoices issued for intercompany agreements appropriately describe the nature and quantity of the services supplied to avoid queries from the VAT authorities and to limit the documents to be produced.
• After reading the Working Paper No. 923 of the VAT Committee¹ dated 28 February 2017, it was already clear that there is natural interplay between the transfer pricing rules set out for direct taxation purposes (focusing on the open market value) and VAT rules (targeting the consideration effectively paid). Taxpayer's activities on a holistic matter is relevant, tax at any angle. There is no abundant Luxembourg case-law dealing with the interactions between those two different tax areas but the guidance provided by the VAT Committee cannot be overlooked in the context of heightened tax litigation.
• Another pending case before the CJEU (Stellantis Portugal, C-603/24) might shed additional light on the relationship between VAT and transfer pricing in the upcoming months.

In more detail

• Arcomet Romania is part of the Arcomet Group, specialised in the purchase and rental of cranes. It resells or rerents them to its customers in Romania.
• Arcomet Belgium negotiates supplier contracts for its subsidiaries, including Arcomet Romania, but Arcomet Romania signs contracts with customers directly. More precisely, Arcomet Belgium assumed a strategic and planning role, whereas Arcomet Romania undertook an operational and commercial role.
• In 2012, Arcomet Belgium entered into a contract with Arcomet Romania, which provided for remuneration, based on the transactional net margin method, under which each party committed to carry out a certain number of services for the other.
• In 2010, a transfer pricing study recommended that the Arcomet subsidiaries maintain an operating profit margin between -0.71% and 2.74%. In fact, the contract between Arcomet Belgium and Arcomet Romania foresaw that an annual invoice had to be issued by the Belgian parent where the Romania subsidiary's operating profit margin was greater than 2.74%, to recover the excess profit, or by Arcomet Romania to Arcomet Belgium where such a margin was less than -0.71%, to cover any excess loss. For the sake of clarity, a negative percentage under the transactional net margin method is uncommon but used when a company operates in a low-margin industry with high fixed costs or cyclical demand, is in a start-up phase or faces economic challenges.
• During 2011-2013, Arcomet Romania recorded an operating profit margin greater than 2.74%. Accordingly, Arcomet Belgium issued three invoices to Arcomet Romania to equalise the profit by transferring the excess profit back to the Belgian parent. It is relevant to note that the invoices were silent regarding the nature of the services purchased by Arcomet Romania, the time spent for each transaction, the human and material resources used, and the method for calculating the rates.
• Arcomet Romania considered that two of them were issued for supplies of services, triggering the self-assessment of Romanian VAT under the reverse charge mechanism, while the third one was issued for a transaction disregarded for VAT purposes.
• In the framework of an audit, the Romanian tax authorities rejected Arcomet Romania's input VAT deduction right as the latter did not manage to prove that the services referred to in the invoices were supplied and necessary for the purposes of its taxable activities.
• In the context of the dispute, the Court of Appeal of Bucharest questioned to the CJEU whether (1) an amount paid by a company to another one to adjust the operating profit margin of the latter represents the consideration for a supply of services and (2) the tax authorities are entitled to request documents beyond invoices to accept the input VAT deduction right of the taxable persons.
• In short, the CJEU considered that the transfer price agreed by two related parties constitutes the consideration for a service supplied.
• Interestingly, the CJEU clarified that while the remuneration agreed by the parties is variable because it depends on the recipient's positive operating profit margin, it is neither voluntary nor uncertain. Therefore, the uncertainty of the remuneration (which could break the direct link between the service provided to the recipient and any payment that may be received) is ruled out in this case.
• However, the CJEU curiously tiptoed the VAT treatment applicable in case the operating profit margin of Arcomet Romania was lower than 0.71%. In our opinion, Arcomet Romania would have had to issue an invoice to Arcomet Belgium, constituting a supply of services taxable in Belgium since there should be direct link between the consideration payable by Arcomet Belgium and the functions assumed by Arcomet Romania (e.g., the responsibility for the sale and rental of the cranes).
• Based on the above, the CJEU considered that Arcomet Belgium supplied services to Arcomet Romania for consideration falling within the scope of VAT.
• Lastly, the CJEU held that the tax authorities could require taxable persons claiming an input VAT deduction right to prove that the services have been received and used for transactions entitling them to recover input VAT, but could not require them to establish the necessity or appropriateness of those services in respect of the transactions carried out.

How we can help

Our Tax team would be happy to assist you with any queries and related VAT and transfer pricing advisory services further to the CJEU's judgment. 

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For further information and to discuss what this development might mean for you, please get in touch with your usual Baker McKenzie contact.

1 Advisory committee consisting of representatives from each EU Member State and the European Commission. It was set up in 1977 under Article 398 of the VAT Directive to promote the uniform application of the provisions of the VAT Directive.