When Transfer Pricing Meets VAT, an Uneasy Relationship Results

The interaction of transfer pricing with value-added tax is a persistent source of complexity for multinational groups and a growing focus for European tax authorities. Recent judgments from the Court of Justice of the European Union in Arcomet, Weatherford Atlas, and Högkullen are reshaping the boundaries of this uneasy relationship.

As a rule, there is no arm’s length principle in EU VAT law. VAT is a transaction-based tax; the taxable amount is the contractually agreed consideration between parties.

Article 80 of the EU VAT Directive provides an exception, allowing member countries to determine the taxable amount by reference to the open market value in specific cases. These cases typically involve related parties and a risk of abuse, such as when the recipient has only a limited right to deduct input VAT.

Still, transfer pricing adjustments often matter for VAT. When the (transfer) price between (related) parties is adjusted, that shift can directly affect the taxable basis for VAT, triggering significant consequences. This includes not only additional compliance burdens—credit notes, VAT return corrections—but also the risk of unrecoverable VAT for businesses in exempt sectors.

Transfer pricing adjustments interact with VAT in three main scenarios.

Price corrections for a previous supply: A transfer pricing adjustment may be directly linked to a correction of the price for goods or services already supplied. Where there is a clear and direct link to a previous transaction, the VAT treatment also must be adjusted, typically by issuing a credit note or additional invoice.

Consideration for a separate supply: Alternatively, a transfer pricing adjustment may represent consideration for services rendered, such as marketing support activities. The adjustment falls within the scope of VAT, provided there is a contractual obligation, a real and identifiable service has been supplied, and there is a direct link between the service and the payment.

Adjustments out of scope of VAT: Adjustments that lack consideration (such as an uncertain remuneration) or reciprocal performance may fall outside the scope. This could occur when tax authorities, following an audit, reallocate costs between related entities. In that case, it could be argued there is no direct link between the adjustment and a specific supply, so the adjustment should remain out of scope.

Recent Cases

Three high-profile EU cases have addressed the VAT treatment of transfer pricing adjustments, highlighting the complexity and case-specific nature of this area.

Arcomet (CJEU, Sept. 4, 2025): Arcomet Romania was engaged in the lease and sale of tower cranes. Its parent company Arcomet Belgium provided general services to Arcomet Romania. The operating margin of Arcomet Romania was determined under the transactional net margin method, or TNMM.

Arcomet Belgium issued a TNMM equalization invoice at year-end to align Romanian profits with the benchmark. Arcomet Romania accounted for the VAT as due and deductible through its own VAT return. The Romanian tax authority denied the deduction, citing lack of evidence that any services had been supplied to Arcomet Romania.

According to the CJEU, even a TNMM-based transfer pricing adjustment may be subject to VAT if there is a direct link between the payment and the supply of an identifiable service. The method of determining the price (such as using the TNMM) is irrelevant. What matters is the substance of the transaction and the supporting documentation.

The court further clarified that tax authorities may require documentation beyond the invoice to secure the input VAT deduction of the recipient, provided that such requirement is necessary and proportionate.

Högkullen (CJEU, July 3, 2025): In Högkullen, the CJEU ruled that tax authorities can’t automatically treat different services provided by a parent company to its subsidiaries (with a limited right of input VAT deduction) as a “single supply” for VAT purposes.

The court held that Articles 72 and 80 of the VAT Directive allow the use of the “open market value” when the recipient is a related party and has limited rights of input VAT deduction.

In such cases, each service should be assessed individually (and not as a single supply) under the comparison method to prevent artificial classifications that could distort the taxable amount and undermine VAT neutrality.

Weatherford Atlas (CJEU, Dec. 12, 2024): In Weatherford Atlas, a Romanian subsidiary received general intra-group services from its parent company. It accounted for the VAT as due and deductible through its own VAT return. The Romanian tax authorities rejected the input VAT deduction because the same services benefited other group companies.

The CJEU disagreed, holding that the right to deduct VAT doesn’t depend on whether a service benefits only one company. What matters is whether there is a direct and immediate link between the services and the recipient’s overall taxable activity. The court confirmed that shared services, when used for taxable outputs, support full input VAT recovery—even if the benefits extend across the group.

Going Forward

Multinationals should now:

• Review scope: Identify which transfer pricing adjustments are linked to a consideration for the supply of goods or services.
• Document services: Maintain contemporaneous evidence—reports, deliverables, time records, contractual documentation—when specific intra-group services are supplied, to secure the input VAT deduction of the recipient.
• Confirm the applicable VAT treatment: If there is any uncertainty as to the applicable VAT treatment of a specific transfer pricing adjustment (in/out of scope of VAT), it’s wise to seek advance rulings or specific decisions from the relevant tax authorities.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Olivier Van Baelen is a counsel in the tax practice group in Baker McKenzie’s Brussels office.

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