1 Background
The VAT treatment of transfer pricing adjustments is controversial and not uniformly regulated across the EU. While VAT Expert Group recommendations exist, these are not binding on Member States. In Germany, clear guidance from the legislature or tax authorities is still lacking. The ECJ has now, for the first time, ruled on whether compensation payments made to adjust profit margins to the arm’s length principle as set out in the OECD Guidelines may constitute remuneration for a taxable supply.

2 Facts
A contract existed between the parent company, Arcomet Belgium, and its subsidiary, Arcomet Romania, governing their respective functions and risks in the crane distribution business. Arcomet Romania purchased or leased cranes and subsequently sold or leased them on. Arcomet Belgium, as principal, assumed the main economic risk and certain strategic functions, such as sourcing suppliers, contract negotiations, and quality management. According to the contract, remuneration for the parties’ services was based on the Transactional Net Margin Method (TNMM) in line with OECD Guidelines. A transfer pricing study determined that Arcomet Romania’s operating profit margin should fall between -0.71% and 2.74%. The contract guaranteed Arcomet Romania a margin within this range and stipulated that:

• If Arcomet Romania achieved a profit within this range, no remuneration was due.
• If a loss exceeding -0.71% was incurred, Arcomet Belgium would compensate Arcomet Romania for the excess loss.
• If the profit exceeded 2.74%, Arcomet Romania would pay the excess profit to Arcomet Belgium.

In the years in dispute, Arcomet Romania achieved profits above the upper threshold. Consequently, Arcomet Belgium invoiced Arcomet Romania for compensation payments. Arcomet Romania subjected these (in part) to VAT under the reverse charge mechanism and claimed input VAT. The Romanian tax authority denied the input VAT deduction due to a lack of evidence of the supply of services and their necessity for taxable transactions.

3 ECJ decision (judgment of 4 September 2025 – C-726/23 – Arcomet Towercranes)
The ECJ held that the compensation payments constituted remuneration for a taxable supply of services. The Court points out that Arcomet Belgium provided clearly defined services resulting in economic benefits for Arcomet Romania. Furthermore, the compensation payments were, in the Court’s view, directly linked to the services, as they were contractually intended to remunerate the activities performed by Arcomet Belgium. According to the ECJ, it is irrelevant that the payment merely aimed to adjust Arcomet Romania’s profit margin, in order to comply with the arm’s length principle. The ECJ also denies that there was any uncertainty regarding the payment that would break the direct link to the supply. The Court reasoned that the modalities of remuneration were contractually determined, in advance, according to precise criteria, so that, as such, remuneration was not uncertain. The fact that the payment direction would have reversed in the event of a margin below -0.71% was not relevant, as this situation did not arise.

Regarding input VAT deduction, the ECJ found that the tax authorities may require additional evidence beyond the invoice in order to verify the substantive conditions. This includes proof of the actual supply of services and their use – but not their necessity – for transactions conferring a right to deduct input VAT. Such evidence must be necessary and proportionate.

4 Consequences for the practice
The ECJ clarified that transfer pricing adjustments are subject to VAT if they are directly linked to a specific supply. Profit-based adjustments should therefore not be treated as VAT-irrelevant per se. Whether such a direct link exists depends on the contractual and economic circumstances of the individual case.

The situation in the referred case was specific: a reciprocal contract explicitly defined the compensation payment as remuneration for a particular supply. In practice, however, circumstances are often different and less clear-cut. In many cases, intra-group supplies are provided during the year at pre-agreed transfer prices, with (often lump-sum) transfer pricing adjustments made at year-end. The underlying contractual arrangements vary from case to case. The question here is rather whether the adjustments increase or decrease the taxable base for VAT and, in the case of supplies of goods, the customs value.

Multinational groups should review their agreements and the handling of their transfer pricing adjustments. Where adjustments have been subject to VAT and input VAT has been claimed, it must be ensured that the link to a specific supply is sufficiently documented. Where adjustments have been treated as non-taxable, it should be examined whether the ECJ’s findings are applicable to the individual case and could therefore result in a different VAT classification. In this respect, it will certainly be necessary to examine more closely under which circumstances remuneration might be uncertain. In this context, the question arises as to how the referred case would have been assessed if, in certain years, Arcomet Belgium had been required to make a payment to Arcomet Romania.