A recent ruling by the Court of Justice of the European Union (CJEU) in the case of SC Arcomet Towercranes SRL has clarified the VAT treatment of intra-group transfer pricing adjustments. The court held that payments made by a subsidiary to its parent company, reflecting operating profit margin adjustments based on OECD transfer pricing rules, can constitute consideration for taxable services under VAT law.

Giles Salmond, Partner and Guy Bud, Associate Barrister, recently wrote in detail on this topic for Tax Journal.

Key points

• Background: Arcomet Belgium, the parent company, provided commercial services and bore economic risks for its subsidiary, Arcomet Romania. The contract stipulated annual profit margin adjustments, calculated using OECD guidelines, with payments made if margins exceeded or fell below set thresholds.
• VAT implications: The CJEU confirmed that such payments, when linked to identifiable services provided by the parent, are subject to VAT. The reciprocal nature of the arrangement—services in exchange for profit margin adjustments—meets the criteria for VAT consideration.
• Limits on tax authority powers: The judgment also clarified that tax authorities can only request information that is necessary and proportionate to assess the existence and use of services for taxed transactions. The right to deduct input VAT is not dependent on the profitability or appropriateness of the services purchased.
• Practical impact: Businesses must carefully analyse contractual arrangements and the economic context of intra-group services. Payments made as transfer pricing adjustments may be taxable under VAT if they are linked to actual services provided.

Why this matters

This decision highlights the importance of reviewing intra-group contracts and transfer pricing arrangements for potential VAT consequences (including in which jurisdiction VAT liabilities arise, and VAT grouping eligibility). It underscores the need for clear documentation and a thorough understanding of the relationship between direct tax adjustments and VAT liability. The case also signals ongoing scrutiny and potential future litigation in this complex area of tax law.

You can read the full article in Tax Journal here.

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