CJEU doctrine on VAT and transfer pricing

The important judgment by the Court of Justice of the European Union (“CJEU”) of September 4, 2025 (case C-726/23, ECLI:EU:C:2025:646) resolves two requests for preliminary rulings submitted by a Romanian court regarding the interpretation of the VAT Directive (2006/112/EC) in relation to the practical application of transfer pricing adjustments.

The case arose as a result of an agreement between Arcomet Belgium (parent company) and Arcomet Romania (subsidiary), under which the parent company supplied business services to the subsidiary and assumed financial risks in exchange for remuneration. Specifically, Arcomet Romania agreed to pay Arcomet Belgium an annual amount corresponding to the portion of operating profit margin that was greater than 2.74%. If the margin was less than –0.71%, Arcomet Belgium would owe remuneration to Arcomet Romania.

Given the circumstances, the two requests for preliminary rulings were raised with the CJEU. The first request for a preliminary ruling addresses whether the annual value adjustments of certain intra-group transactions calculated with the transactional net margin method (“TNMM”) are subject to VAT. The second request asks whether the tax authorities can request other documents in addition to the invoice, to allow the deduction of input VAT.

Subjection to VAT of transfer pricing adjustments 

To resolve the first question, the CJEU must determine whether a service provision is carried out “for consideration” within the meaning of Article 2(1)(c) of the VAT Directive. For these purposes, the CJEU states that “a supply of services is carried out ‘for consideration’ within the meaning of Article 2(1)(c) of the VAT Directive, and is 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.” It clarifies that “That is the case if there is a direct link between the service supplied and the consideration received.”

Following this, the CJEU confirms that the payments made by Arcomet Romania under the contract constitute the remuneration for activities carried out by Arcomet Belgium, as the mentioned requirements are met. In short, for the CJEU, the fact that the framework in which the transaction is carried out is a transfer pricing adjustment does not prevent the consideration that “that transfer price is capable of constituting the actual consideration for a service supplied.” This conclusion is based on the analysis of the specific case object of the CJEU’s resolution and would not be a criteria applicable in any case. A detailed analysis of the factual situation is required.

Also, the CJEU considers that the remuneration is neither voluntary nor uncertain, and its amount is not difficult to quantify. Therefore, the fact that it is a variable remuneration in this specific case does not weaken the existence of a direct link between the service provided and the remuneration received, to the extent that “the detailed rules for that remuneration are laid down in advance in that contract and according to precise criteria, with the result that, as such, that remuneration is not uncertain.”

Regarding the possibility for the parent company to compensate the subsidiary for any excess loss, the CJEU considers that it “is not, in any event, such as to break the direct link between the supply of services at issue and the consideration received,” being very relevant for these purposes the factual context of the case in the main proceedings described by the referring court, in which the adjustment (in all the years subject to litigation) determined, in all cases, a payment to Arcomet Belgium, the service provider, given that Arcomet Romania’s margin was greater than the margin determined in the group policy.

Therefore, the answer to the first request for a preliminary ruling would be to consider that “the remuneration in respect of intra-group services, provided by a parent company to its subsidiary and contractually detailed, which is calculated in accordance with a method recommended by the OECD Guidelines and corresponds to the part of the operating profit margin greater than 2.74% achieved by that subsidiary, constitutes the consideration for a supply of services for consideration falling within the scope of VAT.”

Formal obligations

Regarding the second request for a preliminary ruling, the CJEU clarifies that the right to deduct could be subject to the provision of additional evidence to the invoice, provided that it is necessary and proportionate to prove the reality of the service and its impact on the taxed transactions, in a case in which the invoices do not meet the formal requirements required by law. The judgment validates the requesting of additional evidence when the invoices are too generic, e.g., no indication as to the quantity or the nature of the services, without it being enough to invoke the TNMM as the “accounting adjustment” separate from the real services. 

The judgment recalls the CJEU's consolidated criteria about the impossibility by the Member States to deny the VAT deduction based exclusively on non-compliance with the formal requirements of the invoice required under domestic rules (transposition of the VAT Directive). In these cases, the tax authorities of the Member State can check compliance with the material requirements for the deduction and request additional evidence to the invoice.

Conclusions and practical application

The CJEU’s ruling of September 4, 2025 is very relevant, as it clarifies an area that was traditionally vague in practice in the EU, e.g., this document by the EU Commission's VAT expert group, with cases pending resolution with similarities to the one discussed here, e.g., preliminary question, Stellantis Portugal, C-603/24, submitted one year ago).

In this way, the judgment assumes that end-of-year adjustments, typical of certain transfer pricing policies, directly linked to certain service provisions can, in certain circumstances, be subject to VAT, with the corresponding implications, particularly in groups with limited input VAT deductibility.

We must remember that the Directorate-General for Taxation (“DGT”) has sustained, in its answers to binding consultations V0745-20, V2211-21 and V0565-24, that a price adjustment carried out to assign a profitability appropriate for the functions, assets and risks assumed by the entity in question does not constitute an adjustment of the price or the consideration of a service provided, and therefore, is not subject to VAT. In the DGT’s opinion, there must be (i) a prior, specific and individualized delivery of goods or a service provision for VAT purposes, (ii) a consideration, and (iii) a direct link between the two, so that the adjustment arising from the transfer pricing policy can be considered an adjustment—increasing or decreasing—of the mentioned consideration linked to that prior goods delivery or service provision subject to VAT.

We consider this criterion by the DGT more restrictive than the criterion arising from the mentioned judgment (in the sense that the CJEU’s judgment could lead to more transactions being considered subject to VAT than through application of the DGT’s criterion). Therefore, it will be necessary to review which intra-group contracts apply the TNMM method and whether they can be classified as consideration directly attributable to specific service provisions and not as mere closing “adjustments,” paying particular attention to the description of the services in the contract and the corresponding invoice, e.g., nature, quantity, calculation rule and period. In other words, the CJEU’s judgment resolves a specific case leading to this conclusion, without it being possible to generalize the answer for other cases; therefore, it is necessary to carefully review each contract following the criteria indicated by the CJEU in the judgment object of analysis.

This review can be particularly relevant for those groups with a limited right to the deduction of the input VAT (such as groups engaging in financial and health activities or certain real estate activities), in which the subjection to VAT of the services can mean a significant cost. Therefore, for these taxpayers, the recent CJEU doctrine on determination of the taxable base (Högkullen AB, C-808/23, ECLI:EU:C:2025:516) is particularly relevant, as it opens the way for a valuation admitted for VAT purposes to not coincide with the result of the method used for transfer pricing.

Lastly, and although the group enjoys full deduction of the input VAT, the judgment also raises the bar on evidentiary traceability—without turning it into a business “efficiency” audit—by confirming that the right to deduct could be subject to the contribution of evidence additional to the invoice that justify the effective provision (deliverables, work orders, KPIs, traceability with processes/profits).

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