CJEU doctrine on VAT and transfer pricing

The judgment by the Court of Justice of the European Union ("CJEU") of September, 4 2025 (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 economic risks in exchange for remuneration. Specifically, Arcomet Romania agreed to pay, at the end of each year, an amount corresponding to the portion of operating profit margin that was greater than 2.74%. On the other hand, if the margin fell below -0.71%, the payment would be due in the opposite direction.

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

Subjection to VAT of transfer pricing adjustments

To resolve the first question, where it is sought to determine whether a service provision is carried out "for consideration" within the meaning of Article 2(1)(c) of the VAT Directive, the CJEU recalls, as it has already emphasised in other judgments, 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. 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 above-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 the "remuneration" received by the provider constitutes "the actual consideration for an identifiable service supplied to the recipient". This conclusion is, however, based on the analysis of the specific case decided by the CJEU and is therefore not a criterion applicable in all cases.

Furthermore, the CJEU considers that the remuneration is neither voluntary, uncertain, difficult to quantify nor random. In this regard, the fact that it is a variable remuneration in this specific case does not invalidate the existence of a direct link between the service provided and the remuneration received, to the extent that, as highlighted by the Advocate General in his opinion, "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 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 a payment in favour of Arcomet Belgium, the service provider.

Therefore, the answer to the first request for a preliminary ruling is 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 may 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 taxable transactions, in a case in which the invoices do not meet all the formal requirements required by the regulations. In other words, the judgment validates the requesting of additional evidence when the invoices are too generic (for example, without indication as to the nature or quantity of services), without it being sufficient to invoke the TNMM as an "accounting adjustment" separate from the real services.

In turn, 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 judgment of September 4, 2025 is particularly relevant, as it clarifies an area that was traditionally vague in practice in the EU (by way of example, see this document by the EU Commission's VAT expert group), with questions still pending resolution regarding transfer pricing and VAT (for example, the preliminary reference Stellantis Portugal, C-603/24, submitted in 2024, which has not yet been decided).

The judgment confirms that end-of-year adjustments, typical of certain transfer pricing policies and directly linked to services actually provided, may, in certain circumstances, be subject to VAT, with the corresponding implications, particularly in groups with limited input VAT deductibility.

In this context, it will be necessary to review intra-group contracts that apply the TNMM method in order to assess whether the adjusted amounts can be classified as consideration directly attributable to specific service provisions. This analysis should focus, in particular, on the description of the services in the contracts and the corresponding invoices - nature, amount, calculation method and period to which they refer. In practical terms, the CJEU's judgment resolves a specific case leading to this conclusion, without it being possible to generalise the understanding to all situations. Hence the need for a detailed review of each contract in light of the criteria outlined by the CJEU in the judgment under analysis.

This review is particularly relevant for groups with a limited right to the deduction of input VAT - such as those operating in the financial, health or real estate sectors - in which the subjection of these adjustments to VAT may represent a significant tax cost. For these taxpayers, the recent CJEU case law on determination of the taxable base (Högkullen AB, C-808/23, ECLI: EU:C:2025:516) is also relevant, as it accepts that the valuation admitted for VAT purposes may diverge from the result of the method used for transfer pricing purposes.

Finally, even if the group benefits from full deduction of input VAT, the judgment raises the bar on evidentiary traceability - without turning it into a business "efficiency" audit - by confirming that the right to deduct may be subject to the provision of evidence additional to the invoice that proves the effective provision of services (such as work reports, key performance indicators - KPIs, or correspondence with specific processes and benefits).

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