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The Court of Justice of the European Union (CJEU) on April 3, 2025, published the nonbinding opinion of its Advocate General (AG) in case , which, if followed by the CJEU, could have an important impact on the value added tax (VAT) treatment of intra-group transactions and transfer pricing arrangements.

Facts

The taxpayer, part of a global group specializing in crane rentals, faced a tax dispute involving transactions with its Belgian head office. The issue arose from a transfer pricing study conducted in December 2010, which led to an agreement ensuring a Romanian group entity a specific profit margin range, with adjustments through annual invoices if margins exceeded set limits. In 2011, 2012, and 2013, the Romanian group entity, having recorded profits exceeding the expected range, received three invoices excluding VAT from the Belgian head office, which ultimately classified them as service transactions. The Romanian group entity declared the first two invoices as intra-community service purchases and applied the reverse charge mechanism, but it considered the third invoice as related to transactions outside the scope of VAT. The Romanian tax authority denied the Romanian group entity’s right to deduct VAT on the invoices arguing that the company failed to justify the provision of the invoiced services or their necessity for taxable operations due to the lack of supporting documentation.

Questions before the CJEU

• Should Article 2(1)(c) of the VAT Directive be interpreted to mean that an amount billed by one company to a related company, which aligns the operating company's profit with its activities and assumed risks according to OECD margin principles, constituting a payment for a service and is therefore subject to VAT?
• If the first question is answered affirmatively, can the tax authority require documentation beyond the invoice, such as activity reports or work statements, to justify the use of purchased services for taxable activities, or if the assessment of VAT deduction rights should solely rely on the direct link between the purchase and the taxable transaction or the overall economic activity of the taxpayer?

Advocate General opinion

First question

The AG observed that the determination of whether a transfer pricing adjustment falls within the scope of VAT needs to be made on a case-by-case basis, highlighting three reasons:

• The OECD principles were developed for direct taxation purposes which are very different from those of indirect taxation, as the ECJ has had the opportunity to recognize.
• In terms of transfer pricing, the OECD principles recommend several calculation methods: three traditional transaction-based methods and two transactional profit methods. There are several types of transfer pricing adjustments. Some adjustments are made by tax administrations (primary adjustment, correlative or secondary), others are voluntarily made by taxpayers (compensatory adjustment). Some adjustments are made before the tax return, others are made afterwards. The different methods justify according to the VAT committee a case-by-case assessment when it comes to whether or not these adjustments should be subject to VAT. The VAT expert group, which advocates considering these adjustments as being outside the scope of the VAT Directive, adds that this should always be the case for adjustments made by the tax administration, as such adjustments cannot be considered as the consideration for a service provided for a fee. The AG observed however that these debates should not lose sight of the fact that adjustments related to a service or the delivery of a good are a modification of the price of the service or the good invoiced, while it follows from the decision to refer that, in the case in the main proceedings, it seems that the transfer pricing calculation method is used directly to calculate, a posteriori, the remuneration of the intra-group service provision, without further adjustment.
• The VAT treatment is linked to the economic and commercial reality of situations, which requires a case-by-case study of the meeting of the conditions of application of the VAT Directive. Therefore, it is necessary to examine whether the conditions set out in Article 2(1)(c) of this Directive are met, namely whether services have been provided for a fee on the territory of an EU member state by a taxable person acting as such. In this respect, a service is considered provided for a fee, and is therefore subject to VAT, only if there is a legal relationship between the provider and the recipient in which reciprocal services are exchanged, the remuneration received by the provider constituting the effective counter-value of an individualizable service provided to the recipient. This is the case if there is a direct link between the service provided and the counter-value received.

The AG observed that with respect to the legal relationship, the companies concluded a contract outlining specific commercial responsibilities and services each party will provide for the other, with compensation based on the transactional net margin method. The Belgium head office's provision of services to the Romanian group entity, which includes negotiating contract terms and fulfilling various roles in the Romanian group entity's economic activities, meets the condition of an individualizable service. The direct link between the service provided and the counter-value received is more complex due to the remuneration methods chosen by the parties. However, the CJEU has consistently ruled that the amount of the consideration is irrelevant, especially whether it is equal to, greater than, or less than the costs incurred by the taxable person. Therefore, the modalities of this remuneration, set in the contract, are devoid of uncertainty, making the remuneration amount for services provided by the Belgian head office to the Romanian group entity perfectly determinable upon the contract's conclusion. The claim by the Romanian group entity that the remuneration corresponds to a transfer price, not subject to VAT as such, cannot justify an exclusion from the scope of the VAT Directive.

The AG therefore recommends the CJEU  to rule that Article 2(1)(c) of the VAT Directive should be interpreted in the sense that the remuneration of intra-group services, provided by a parent company, assuming commercial responsibilities, to a subsidiary and detailed contractually, which is calculated according to the transactional net margin method recommended by the OECD principles, should be considered as the counterpart of a service provided for a fee, within the meaning of this provision, and should be subject to VAT.

Second question

The AG observes that the CJEU's consistent jurisprudence on VAT deduction requires a direct and immediate link between a particular upstream operation and one or more downstream operation(s) giving rise to a right of deduction. The CJEU has also ruled that the principle of VAT neutrality requires the deduction or reimbursement of upstream VAT to be granted if the substantive requirements are met, even if certain formal requirements have been omitted by taxable persons. The CJEU has also stated that it is the taxable person who is asking for the VAT deduction who must prove that they meet the conditions to benefit from it. The tax authorities can therefore require the taxable person to provide the evidence they deem necessary to assess whether or not to grant the requested deduction.

The Romanian group entity argued that by requiring elements other than the simple invoice of service provisions, the Romanian tax authority did not respect the principle of proportionality. However, the principle of proportionality does not oppose requiring proof of the substantive conditions of the right to deduction beyond the mere production of an invoice, as this is about taking into account the objective characteristics of the operations examined.

Therefore, the AG proposed to answer the second question that Articles 168 and 178 of the VAT Directive should be interpreted as not opposing a tax administration requiring a taxable person seeking VAT deduction to provide other documents besides the invoice to justify the use of purchased services for the needs of their taxed operations, provided that these documents are requested in accordance with the principle of proportionality and that they are capable of proving the existence of the services in question and their use for the needs of the taxable person's taxed operations, which is for the national court to verify.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø observation

The VAT treatment of transfer pricing adjustments has for a long time been elusive and subject to several in depth papers from the EU VAT Committee and the EU VAT Expert Group, arriving at slightly different conclusions. EU tax authorities have so far only published limited guidance on the matter. This case as well as other pending cases before the CJEU (e.g., Case Stellantis Portugal, S.A.) would thus provide some long-sought clarity on the VAT treatment of transfer pricing arrangements in the EU.

If the CJEU follows the AG’s recommendations, businesses may need to take the following steps:

• Review inter-company agreements and determine on a case-by-case basis whether the transaction is subject to VAT. Arrangements using the transactional net margin method should be prioritized since the case is focused on these.
• If the arrangements are determined to be subject to VAT, review supporting documentation (invoices and other documents) so that (1) invoices have been duly issued for these transactions and (2) sufficient evidence exists that the goods/services are effectively supplied for the benefit of the receiving entity.

Contact us

For more information, contact a ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø tax professional:

Philippe Stephanny | philippestephanny@kpmg.com

Chinedu Nwachukwu | chinedunwachukwu@kpmg.com