Briefing document & Podcast: C-726/23 (Arcomet Towercranes) – VAT and Transfer Pricing Adjustments on on Intra-Group Services

Briefing Document: Arcomet Towercranes Case – VAT on Intra-Group Services

1. Introduction:

This briefing document summarizes the key themes and ideas from the provided sources regarding the Arcomet Towercranes case and its implications for VAT on intra-group services. The case revolves around a dispute between Arcomet Roumanie (subsidiary) and Romanian tax authorities concerning VAT deductions on payments made to Arcomet Belgique (parent company) for intra-group services. The core question is whether these payments, designed to adjust the subsidiary’s operating margin in line with transfer pricing rules, constitute consideration for a service and are therefore subject to VAT.

2. Central Legal Question:

The central legal question before the Court of Justice of the European Union (CJEU) is: “whether a payment made by a subsidiary (Arcomet Roumanie) to its parent company (Arcomet Belgique) to adjust its operating margin to comply with transfer pricing rules constitutes payment for a service and is therefore subject to VAT.” This hinges on interpreting Article 2(1)(c) of the VAT Directive (2006/112/EC). A secondary, but crucial, aspect concerns the extent to which tax authorities can demand documentation beyond invoices to justify VAT deductions.

3. Key Principles and Definitions:

VAT (Value Added Tax): A consumption tax assessed on the value added to goods and services at each stage of production or distribution.
VAT Directive (2006/112/EC): The EU directive that establishes the common system of VAT.
“Prestation de services effectuée à titre onéreux” (Supply of services effected for consideration): A service provided in return for payment or other compensation; a key condition for VAT application. The CJEU emphasizes the necessity of a “direct legal relationship between the service provider and the recipient involving reciprocal performances.”
“Assujetti”: A taxable person liable to pay VAT.
Intra-group Services: Services provided by one company to another within the same group of companies.
Transfer Pricing: The setting of prices for goods and services sold between related entities within a multinational corporation.
Arm’s Length Principle: “The principle that transactions between related parties should be conducted as if they were between independent parties.” In Arcomet, the concern is whether the margin adjustments represent genuine service payments or artificial constructs for tax purposes.
OECD Principles: Guidelines issued by the Organisation for Economic Co-operation and Development (OECD) on transfer pricing. The CJEU considered “whether adherence to OECD principles automatically implies that payments between companies should be regarded as consideration for services and thus subject to VAT. The court clarified that while transfer prices can be the effective value of a supplied service, the existence of a service must still be established based on all circumstances.”
Right to Deduction: The right of a taxable person to deduct the VAT they have paid on purchases from the VAT they collect on sales.
Formal Conditions: The procedural requirements, such as holding a valid invoice.
Material Conditions: The substantive requirements, such as the goods or services being used for taxed operations, and supplied by another taxable person.

4. Services Provided by Arcomet Belgique:

According to the contract of January 24, 2012, Arcomet Belgique provided Arcomet Roumanie with services including: “strategic planning, negotiating supplier contracts, financial management, engineering, risk management, and overall operational support.” These services were considered “to actively contribute to the management and economic activity of Arcomet Roumanie, influencing its operating margin.”

5. CJEU Ruling and Key Findings:

Article 2(1)(c) Interpretation: The CJEU ruled that “the remuneration of intra-group services, supplied by a parent company to its subsidiary and detailed contractually, which is calculated in accordance with a method recommended by the principles applicable in the matter of transfer prices, adopted by the Organisation of Economic Cooperation and Development (OECD) and corresponds to the part of the operating margin greater than 2.74% realized by the subsidiary, constitutes the quid pro quo of a service performed for consideration falling within the field of application of Value Added Tax.”
In essence, payments aligning with OECD transfer pricing can be subject to VAT if they represent genuine services, not simply artificial adjustments. The existence of a contract detailing reciprocal obligations between the parties is an important factor.
Documentation Requirements for VAT Deduction: The CJEU addressed the question of whether tax authorities can demand documents beyond invoices. The ruling states that “Articles 168 and 178 of Directive 2006/112 must be interpreted as meaning that they do not preclude the tax administration from requiring a taxable person who requests deduction of the Value Added Tax paid upstream to provide documents other than the invoice to prove the existence of the services mentioned on this invoice and their use for the needs of the taxable transactions of that taxable person, provided that the production of that evidence is necessary and proportionate to those ends.”
Tax authorities can request additional documentation to verify the “reality of the service and its use for the taxable person’s taxed operations,” but these requests must be “necessary and proportionate.” Automatic denial of a VAT deduction based solely on formal invoice deficiencies is not permissible if the authorities have sufficient information to verify the substantive conditions are met.
To qualify for a VAT deduction, an “assujetti” must demonstrate that “they are a taxable person, and that the goods or services for which they seek the deduction are used for their own taxed operations. They must show that the goods or services were supplied by another taxable person.”

6. Implications for Businesses:

The Arcomet Towercranes case has several important implications:

Intra-group Service Agreements: Businesses need to carefully structure and document intra-group service agreements. Clear and specific descriptions of services provided are crucial.
Documentation Practices: Companies must maintain robust documentation to substantiate VAT deductions, going beyond mere invoices. This includes records that prove the reality and use of the service.
VAT Compliance Strategies: This ruling emphasizes the importance of integrating VAT considerations into transfer pricing policies and documentation. Tax authorities are likely to scrutinize intra-group transactions more closely.
Burden of Proof: The “assujetti” bears the burden of proving they are entitled to a VAT deduction.
Proportionality: The additional documentation demanded by the tax authority must be proportional and necessary,

7. Outstanding Issues:

The national court (Curtea de Apel Bucureşti) must now apply the CJEU’s guidance to the specific facts of the Arcomet Towercranes case to determine whether the payments made by Arcomet Roumanie were indeed for genuine services and whether the Romanian tax authorities’ demands for additional documentation were proportionate.