Arcomet Towercranes Case C-726/23

Background of the case

• A contract was concluded in 2012 between Arcomet Service NV (“Belgian Parent Co.”) and SC Arcomet Towercranes SRL (“Romanian Subsidiary”), where both parties agreed to carry out certain functions for the other i.e., Belgian Parent Co. undertook the majority of the commercial responsibilities e.g., strategy, planning, negotiating contracts with third-party suppliers, negotiating terms and conditions etc, and the Romanian Subsidiary undertook to purchase and hold all the goods and to be responsible for the sale and rental of those goods and for the provision of ancillary services. 
• The contract provided that the remuneration should be based on the transactional net margin method as outlined in the OECD Transfer Pricing Guidelines.
• To keep the operating profit for the Romanian Subsidiary within an OECD-compliant range of -0.71% to 2.74% as determined by a Transfer Pricing study carried out in 2010, equalisation invoices were issued annually i.e.,
  • If profits exceeded 2.74%, the Belgian Parent Co. invoiced the Romanian Subsidiary.
  • If profits fell below -0.71%, the Romanian Subsidiary invoiced the Belgian Parent Co.
• In 2011, 2012 and 2013, the Romanian Subsidiary recorded an operating profit margin of more than 2.74% so the Belgian Parent Co. issued invoices (exclusive of VAT) to the Romanian Subsidiary.

Key Question Referred to the Court of Justice of the EU (“CJEU”)

The CJEU was asked the following questions:

1. Whether remuneration arising from intra-group services, calculated in accordance with the Transactional Net Margin Method of the OECD Guidelines constitutes consideration for a supply of services within the scope of VAT.
2. If the payment is within the scope of VAT, whether the request for additional documents other than the invoice is in accordance with the principle of proportionality and the objective of the EU VAT Directive.

CJEU’s Findings

Question 1 – Supply for VAT purposes?

• The CJEU ruled that amounts invoiced between group companies to align profits, even if in accordance with  OECD Transfer Pricing Guidelines, can constitute payment for services within the scope of VAT.
• In the case, the CJEU ruled specifically outlined that the payments made by the Romanian Subsidiary to the Belgian Parent Co. should constitute payments for services within the scope of VAT for the following reasons:

1. The Belgian Parent Co. was contractually obliged to provide services to the Romanian Subsidiary and noted that such services should be considered taxable services for VAT purposes. 
2. There was a direct link between those services and the consideration received and that such link was not affected by the remuneration arrangements laid out in the contract. 
3. The CJEU held that although the amount of consideration payable is variable as it is based on the operating profit margin of the Romanian Subsidiary, the remuneration is not uncertain.
4. If the operating profit margin was less than -0.71%, remuneration was payable by Belgian Parent Co. to the Romanian Subsidiary, the CJEU held this should not have the effect of breaking the direct link between the supply of services at issue and the consideration received.

Question 2 - Request for Additional Documents

• The CJEU ruled that tax authorities can request a taxable person seeking a deduction of VAT to submit documents other than the invoice in order to prove the existence of the services referred to in that invoice and their use for the purposes of the taxable activities of the taxable person, provided that the submission of that evidence is necessary and proportionate for that purpose.

Implications for Businesses

• Businesses should review intra-group agreements and Transfer Pricing policies for any potential VAT implications.

• Ensure that intra-group invoices contain sufficient detail to support VAT deduction claims.
• Review ERP systems to ensure that the systems are capable of recording Transfer Pricing adjustments.
• Considering the developments in VAT e-invoicing and digital transaction-based reporting, businesses should ensure that any Transfer Pricing invoices will be compliant from an e-invoicing and a digital transaction-based reporting perspective.