In its judgment in the Arcomet case, the Court of Justice of the European Union (CJEU) shed light on an area that has previously received less attention: certain transfer pricing adjustments cannot be regarded merely as accounting entries. In many cases, they may qualify as VAT-taxable services. This ruling prompts a reconsideration of how intra-group settlements are treated from a VAT perspective.
The case centered around a parent company that was actively involved in the operations of its subsidiary. It did not act merely as a financial investor but provided strategic guidance, participated in negotiations, made financing decisions, and took on business risks. At the end of the year, the parties settled accounts using a pre-determined formula: the so-called true-up mechanism was used to align the subsidiary’s profits with market levels. The key question was whether this retrospective adjustment constituted consideration for a service subject to VAT.
VATable transfer pricing…
According to the Court, under certain conditions, the answer is clearly yes. The core of the reasoning is that when a parent company performs actual, contractually agreed tasks, the amount paid by the subsidiary under the true-up mechanism cannot be viewed as a mere accounting adjustment – it is, in fact, consideration for a service. The fact that the adjustment amount depends on the subsidiary’s results (and thus cannot be precisely determined in advance) does not make any difference, provided that the calculation is based on a pre-defined, objective, and transparent formula – such as the TNMM range. This is sufficient to establish a direct link between the consideration and the service, which is one of the fundamental criteria for VAT liability.
The judgment also highlighted that OECD transfer pricing principles and the logic of VAT differ. A transfer pricing analysis alone does not determine how a transaction should be treated for VAT purposes. The first step is always to examine whether there is an identifiable service provided between the parties, whether there is mutual contractual commitment, and whether the payment constitutes actual consideration. In Arcomet, all three conditions were met – hence, the true-up was deemed consideration for a service.
…unless when it isn’t
The judgment also serves as a warning: not every true-up is automatically a VATable transaction. For instance, if the parent company acts as a passive holding entity – i.e., it does not provide any real services – then payments made by the subsidiary are not subject to VAT. The same applies in situations where a service may exist in theory, but the parties only make accounting adjustments without any actual payments between them. In such cases, the transaction must be assessed as a free-of-charge service, which is generally not subject to VAT.
In fact, the judgment indirectly suggests that if, due to the nature of the transfer pricing formula, the true-up flows in the opposite direction in some years (i.e., the service provider pays the “consideration”), then even in those years no VATable service is deemed to occur.
What’s next?
Nothing illustrates the relevance of this issue better than the fact that another similar case is already pending before the CJEU. In the Stellantis Portugal case, the Court is examining whether cost reimbursements related to warranty issues – based on transfer pricing – should be regarded as a separate VATable service, or whether they can simply be treated as adjustments to the sales price of the vehicles. A ruling is expected perhaps in the first half of next year.
In the meantime, even based only on the Arcomet case, it is worth reviewing intra-group contracts and settlement mechanisms. The key takeaway from the judgment is that transfer pricing and VAT cannot be treated in complete isolation. Retrospective adjustments often reflect a genuine, compensated service that can have significant VAT implications.
Now is the time for companies to audit their current practices, and where necessary, revise contracts, invoicing processes, and documentation. It is also advisable to compile a set of evidence that can demonstrate to the tax authorities, if needed, whether a true-up reflects an actual service rendered.