Briefing Document: Advocate General’s Opinion in Case C-726/23, SC Arcomet Towercranes SRL v Direcţia Generală Regională a Finanţelor Publice Bucureşti
Source: Excerpts from the Advocate General Jean Richard de la Tour’s Opinion in Case C-726/23, ECLI:EU:C:2025:244, delivered on 3 April 2025.
Subject: VAT implications of transfer pricing adjustments in intra-group transactions and the evidentiary requirements for VAT deduction.
I. Introduction
This document provides a briefing on the Advocate General’s Opinion in Case C-726/23, concerning a preliminary ruling requested by the Curtea de Apel Bucureşti (Court of Appeal, Bucharest, Romania). The case involves SC Arcomet Towercranes SRL (Arcomet Romania), a subsidiary within the Arcomet Group, and the Romanian tax authorities regarding the VAT treatment of intra-group administrative services and a subsequent adjustment payment based on transfer pricing principles.
The Advocate General (AG) addresses two key questions:
- Whether a payment made by a subsidiary to its parent company to adjust the subsidiary’s profit margin in accordance with OECD transfer pricing guidelines constitutes consideration for a service subject to VAT.
- Whether tax authorities, when assessing the right to deduct VAT, can demand documents beyond the invoice to prove that the acquired services were used for the purposes of the taxable person’s taxable transactions.
The AG proposes that the Court of Justice of the European Union (CJEU) should rule that the transfer pricing adjustment in this specific context is subject to VAT and that tax authorities can request additional documentation beyond the invoice, provided they do so proportionally and the requested documents are relevant to proving the existence and use of the services for taxable transactions.
II. Main Themes and Important Ideas/Facts
A. Background of the Case:
- Arcomet Romania is part of a global crane rental group. While Arcomet Romania buys or leases cranes for resale or rental, Arcomet Service NV Belgique (Arcomet Belgium), the parent company, identifies and negotiates with suppliers for its subsidiaries, including Arcomet Romania. However, the actual purchase and lease agreements are between Arcomet Romania and the third parties.
- A 2010 transfer pricing study for transactions between Arcomet Belgium and its subsidiaries determined an acceptable operating profit margin range of -0.71% to 2.74%.
- In 2012, Arcomet Belgium and Arcomet Romania entered into an agreement where Arcomet Belgium was guaranteed an operating profit margin within this range. If Arcomet Romania’s profit exceeded 2.74%, it would issue an adjustment invoice to Arcomet Belgium, and vice versa if the loss exceeded -0.71%.
- For the years 2011, 2012, and 2013, Arcomet Romania, having exceeded the profit margin, received three VAT-exempt invoices from Arcomet Belgium. Arcomet Romania treated the first two as intra-Community acquisitions of services under the reverse charge mechanism but considered the third to be outside the scope of VAT.
- A tax audit resulted in a demand for additional VAT, interest, and penalties, as the Romanian tax authorities denied Arcomet Romania’s right to deduct VAT on the grounds that it had not provided sufficient evidence of the services being rendered or their necessity for its taxable transactions.
B. First Question: VAT Applicability to Transfer Pricing Adjustments
- The AG notes the complexities arising from the interaction of direct tax (transfer pricing) and indirect tax (VAT) systems. He highlights that OECD transfer pricing guidelines were developed for direct taxation purposes, aiming to ensure appropriate tax bases and prevent double taxation by applying the arm’s length principle.
- The AG emphasizes that the VAT treatment of transfer pricing adjustments should be assessed on a case-by-case basis due to the distinct objectives and mechanisms of direct and indirect taxation. He cites the VAT Committee’s Working Paper No. 923, which points to the tension between the arm’s length principle (for direct tax) and the principle of consideration (for VAT).
- Despite discussions within the VAT Expert Group suggesting that transfer pricing adjustments should generally fall outside the scope of VAT, the AG argues that the specific circumstances of the transaction must be examined to determine if the conditions for VAT liability under Article 2(1)(c) of the VAT Directive (supply of services for consideration) are met.
- In this case, the AG finds that the conditions are likely met. The agreement between Arcomet Belgium and Arcomet Romania establishes a legal relationship with reciprocal performance, where Arcomet Belgium undertakes various operational responsibilities while Arcomet Romania is responsible for sales and rentals.
- The adjustment payment, while calculated based on a profit margin, is the mechanism for remunerating Arcomet Belgium for these services. The AG argues that despite the variable nature of the payment, the criteria for its calculation are clearly defined in the agreement, establishing a direct link between the services provided and the consideration received.
- The AG concludes that, in this specific context, the transfer pricing adjustment constitutes consideration for intra-group services and is subject to VAT under Article 2(1)(c) of the VAT Directive.
C. Second Question: Evidentiary Requirements for VAT Deduction
- The AG reiterates the established CJEU case law on the right to deduct VAT under Article 168 of the VAT Directive. The right to deduct input VAT arises when goods and services are used for the purposes of a taxable person’s taxed output transactions and are supplied by another taxable person at a prior stage.
- The AG acknowledges the fundamental principle of VAT neutrality, which dictates that VAT deduction should be granted if the substantive requirements are met, even if certain formal requirements are not. However, this is not the case if the failure to comply with formal requirements prevents conclusive proof that the substantive requirements have been met.
- Regarding the burden of proof, the AG states that it rests with the taxable person seeking the VAT deduction to demonstrate that the necessary conditions are fulfilled. Tax authorities can request the documentation they deem necessary to assess whether the deduction can be granted, which can include documents from the suppliers of the goods or services.
- The AG addresses Arcomet Romania’s argument that the Romanian tax authority’s demand for documents beyond the invoice violates the principle of proportionality. He clarifies that while Member States must use means that effectively achieve the aims of national legislation while minimally affecting EU law principles, demanding proof beyond the invoice to verify the substantive conditions for deduction does not inherently violate proportionality if it is necessary to consider the objective characteristics of the transactions.
- The AG concludes that Articles 168 and 178 of the VAT Directive do not preclude tax authorities from requesting documents other than the invoice to prove the use of acquired services for taxable transactions, provided such requests are proportionate and the documents are suitable for demonstrating the existence and use of the services for the taxable person’s taxed outputs. The national court is responsible for assessing the appropriateness and relevance of the requested documentation.
III. Conclusion
The Advocate General proposes that the CJEU should rule that the transfer pricing adjustment in this case is subject to VAT as consideration for services and that tax authorities can request additional evidence beyond the invoice to verify the right to deduct VAT, adhering to the principle of proportionality. This opinion underscores the need for a case-by-case analysis of the VAT implications of transfer pricing adjustments and affirms the power of tax authorities to seek adequate proof to support VAT deductions. The national court will ultimately need to determine, based on the Advocate General’s guidance, whether the Romanian tax authorities’ demands were proportionate and whether Arcomet Romania has sufficiently demonstrated the use of the services for its taxable transactions.
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