Luxembourg Tax Alert 2025-06

On 4 September 2025, the Court of Justice of the European Union (hereafter “CJEU”) delivered its judgment in the Arcomet case (C-726/23). The Court ruled that year-end transfer pricing adjustments reducing profits to within the arm’s-length range may fall within the scope of VAT in specific cases, namely where the underlying services and payment terms were pre-agreed. The Court also clarified that any documentation requirements beyond the invoice must be reasonable and cannot compel businesses to prove that the services were economically necessary or appropriate.

As a reminder, the case arose within the Arcomet group, which operates in the crane rental sector with entities in Belgium and Romania. Arcomet Belgium (hereafter “BelCo” or “parent company”) negotiated and managed supplier contracts, while Arcomet Romania (hereafter “RomCo” or “subsidiary”) purchased or leased cranes for resale or lease to customers.

A transfer pricing study conducted in 2010 set an operating margin range for RomCo between -0.71% and 2.74%. To maintain this margin, BelCo and RomCo agreed in 2012 on an annual adjustment mechanism: if RomCo’s profits exceeded 2.74%, BelCo would invoice RomCo; if profits fell below -0.71%, RomCo would invoice BelCo. These adjustments were based on the transactional net margin method recommended by the OECD.

In subsequent years, RomCo recorded profits above the agreed range and received adjustment invoices from BelCo excluding VAT. RomCo initially applied the reverse charge mechanism but later considered the invoices outside the scope of VAT. Romanian tax authorities denied RomCo’s VAT deductions, citing insufficient evidence that the invoiced services were provided or necessary.

The Romanian courts referred questions to the CJEU, and the Advocate General Richard de la Tour, issued an opinion on 3 April 2025. The Advocate General stated that the VAT treatment of transfer pricing adjustments must be assessed on a case-by-case basis and, in this instance, concluded that the adjustments, linked to contractual arrangements and services such as strategic planning and contract negotiation, constituted taxable supplies subject to VAT. Advocate General Richard de la Tour also recalled that a 2016 report of the VAT Committee at the European Commission recommended distinguishing between adjustments imposed by tax authorities (outside the scope of the VAT Directive) and those agreed between related parties. Member States can choose whether past supply or cost variance adjustments are subject to VAT, and only one country has opted to exclude them when both parties can fully recover VAT.

The CJEU followed the Advocate General’s opinion in its judgment. It confirmed that payments made under the intragroup agreement between the Belgian parent company and its Romanian subsidiary amounted to consideration for identifiable services supplied by the parent company. The fact that the remuneration was calculated using a transfer pricing method such as the transaction net margin method and varied with results did not affect its VAT treatment, since the terms were contractually agreed in advance and were neither voluntary nor uncertain.

The Court rejected the argument that these payments were merely arm’s-length adjustments without an underlying supply, stressing the existence of a direct link between the services performed and the amounts paid. It found that, despite being framed as a TP adjustment, the Belgian parent company had supplied services to its Romanian subsidiary. Under the contract, the parent company actively managed and supported the subsidiary and provided reciprocal services typical of intragroup arrangements, reflecting genuine economic and commercial activity.

The Court also clarified that the direct link between the services provided, and the consideration received does not depend on the payment terms and can only be broken if the payment itself is uncertain. In this case, no such uncertainty existed. Referring to its judgment in Baštová, the Court reasoned that the remuneration was neither voluntary nor uncertain and that the amount was not difficult to quantify. It also noted that the “reverse” situation of payments going from the Romanian subsidiary to the Belgian company was not before it and therefore not analyzed.

Finally, on input VAT recovery, the CJEU reiterated the basic conditions for deduction. Tax authorities may request additional, proportionate evidence beyond the invoice to verify that the services were provided and used for taxable activities. However, they cannot require businesses to prove the economic necessity or appropriateness of those services as a condition for exercising the right of deduction.

It is important to put the Arcomet ruling into perspective. The fact that remuneration is determined using a transfer pricing method, such as the Transactional Net Margin Method (“TNMM”), does not automatically mean that it falls within the scope of VAT. The Court itself confirmed that VAT applies in this case because there was a clear contractual agreement whereby a service was provided in exchange for remuneration. In other words, the taxable base here corresponds to actual consideration for identifiable services, it is this factual link that brings the adjustment within the scope of VAT, not merely the use of a transfer pricing method.

From a transfer pricing perspective, the Arcomet judgment is a clear reminder that the strength of an intragroup arrangement lies not only in the numbers, but in how the transaction is delineated and documented. The Court placed particular emphasis on the fact that the agreement between the Belgian and Romanian entities spelled out their respective functions and responsibilities, and that the remuneration mechanism followed directly from those roles. In other words: it is not enough to demonstrate that an outcome falls within an arm’s-length range, the contractual and commercial framework behind it must also be crystal clear. The case also shows that methods such as the TNMM, especially when supported by year-end adjustments, require thoughtful design and careful explanation. When those adjustments are linked to identifiable services, they can bring VAT considerations, as do any services that are implemented between related parties, but they also give tax authorities an accessible entry point to question whether the arrangement reflects economic reality.

For taxpayers, the lesson is straightforward: ensure that intragroup agreements and TP documentation not only justify the pricing methodology but also tell the commercial story behind it. Doing so creates a stronger compliance culture, makes challenges less likely, and provides a solid defense if an audit does come.

Overall, the judgment should be seen as a welcome clarification rather than a major shift: it does not signal a broad change to VAT rules for all transfer pricing adjustments. The CJEU did not follow the more flexible approach suggested by the VAT Committee report, but instead applied long-standing VAT principles consistently. This outcome was expected and confirms that, where a clear service is provided and remunerated, VAT should apply. At the same time, it reassures businesses that adjustments with no underlying supply remain outside the scope.

The decision is therefore both logical and useful in reducing the risk of diverging interpretations across Member States.

Your team of VAT and TP experts remains at your disposal for any questions you may have regarding the above and will be happy to help.