Transfer pricing adjustments and sales tax – uncertainties remain

ECJ ruling on transfer pricing adjustments

Transfer pricing adjustments are a key issue in the international corporate environment. They serve to price intra-group services in line with market conditions and to ensure the distribution of taxable profits between affiliated companies. The current ECJ ruling of September 4, 2025 (C-726/23, Arcomet Towercranes) dealt with the question of whether a compensation amount determined in accordance with the OECD transfer pricing guidelines can constitute remuneration for a service from a VAT perspective.

Arm's length margins (in the Arcomet Towercranes case)

In the case in question, a Belgian parent company and its Romanian subsidiary had entered into a contract in which each party undertook to provide a range of services to the other (e.g., parent company to subsidiary: management and procurement services). To remunerate these services, it was agreed that compensation payments would be made depending on the subsidiary's margin, calculated using the transaction-based net margin method (TNMM).

If the margin calculated was higher than the arm's length operating margin, the subsidiary paid compensation to the parent company. If the margin calculated was lower, the payment was made in reverse. If the margin was within the arm's length range, no payments were made. The final settlement of the compensation payment was made at the end of the fiscal year.

ECJ ruling and unresolved issues

The ECJ's ruling is very unspecific and is essentially based on the concluding observations of the Advocate General. He refers to the general principles of exchange of services and emphasizes that the contractual basis in the case is sufficient for the service (of the parent company) and payment (of the subsidiary) to take place in exchange for services. The fact that this constellation presupposes a positive profit margin for the subsidiary did not change the ECJ's opinion. The ECJ does not make any specific comments on transfer pricing adjustments, except for the conclusion that a transfer price can also represent the actual equivalent value of a service rendered.

As a result, exciting VAT questions on this complex topic remain unanswered.

For example, the ECJ only had to decide how to assess compensation payments from the subsidiary to the parent company (higher margin than usual). The reverse case of a lower margin, which leads to a compensation payment from the parent company to the subsidiary, is not mentioned.

The ECJ also does not comment on transfer pricing adjustments. From a VAT perspective, a change in the tax base would be conceivable here, for example.

Finally, the transaction net margin method (TNMM) is only one of several methods for determining transfer prices in accordance with the OECD Transfer Pricing Guidelines. The question here is what the VAT consequences would be if a different method were chosen.

Impact on practice

Companies therefore continue to face challenges in the VAT treatment of transfer price adjustments, particularly in complex group structures. It is to be hoped that the ECJ will make more specific statements in further rulings on transfer prices in the context of VAT. The VAT relevance of this ruling is likely to be considered rather low.