SC Arcomet Towercranes SRL, a Romanian affiliate of Arcomet Belgium, operated under an internal agreement that stipulated that intragroup services provided by the parent company would be invoiced, allowing the affiliate to operate with a margin within the range of −0.71% to 2.74%. If, in any financial year, the profit exceeded that range, the parent company would issue compensatory invoices to reduce the margin to the agreed-upon level.
These adjustments were applied in fiscal years 2011, 2012, and 2013, when the affiliate exceeded its margins and received additional invoices from Arcomet Belgium, which were recorded as deductible expenses and as consideration for intragroup services.
Conversely, the Romanian tax authorities rejected the deduction of these expenses and the associated VAT, considering that Arcomet Romania had not demonstrated the actual need for the services nor the sufficient documentation supporting effective rendering. The case reached the Romanian Court of Appeal, which referred several questions to the Court of Justice of the European Union (CJEU) to clarify the interpretation of VAT Directive 2006/112/EC.
Technical Analysis of the Case
The core of the controversy lay in determining whether the adjustments made by the parent company constituted consideration for services actually rendered, which could generate the right to a VAT deduction, or whether, otherwise, they represented mere accounting adjustments of results within a multinational group without sufficient economic substance to be considered a taxable transaction.
The mechanism used by Arcomet was based on an intra-group pricing agreement using the Transactional Net Margin Method (TNMM), set out in the OECD Transfer Pricing guidelines, by which the affiliate should obtain profitability within a predetermined range consistent with its limited functional profile.
Such structures are common when affiliates act as limited-risk entities whose profits must be kept within narrow margins. When actual profits exceed the target range, the parent company adjusts the result by issuing invoices for additional services, shifting the excess earnings to its accounts.
The Romanian administration argued that these invoices did not reflect actual services and that a mere target margin can not support the expense or the VAT credit. To support the deduction, the services must be actually demonstrated in the taxable activity, as well as the functional and economic traceability supporting the invoiced value.
The CJEU, following the opinion of the Advocate General, adopted a dual technical approach:
- On the one hand, formalized contracts, prices determined based on recognized methodologies, and documented adjustments that directly affect the remuneration among parties constitute consideration for services within the terms of Article 2 of the VAT Directive. In other words, adjustments derived from margin surpluses are not mere accounting entries, but economic transactions subject to VAT.
- On the other hand, it specified that a mere invoice does not automatically grant the right to VAT deduction. According to Articles 167 et seq. of the Directive, the authorities may require additional documentation (management reports, evidence of task performance, resource consumption records, or progress reports) demonstrating the actual rendering of the service and its relation to taxable transactions.
This approach reinforces the economic reality principle over legal form, applying functional analysis standards similar to those used in Transfer Pricing (functions performed, assets used, and risks assumed) to determine the substance of the intragroup services.
Conclusions
The CJEU ruling in the Romania v Arcomet Towercranes case sets an important precedent for companies with multi-location structures within the European Union. It reinforces the idea that intra-group service agreements with agreed margins must be supported not only by contracts and invoices but also by functional documentation proving the functional provision and necessity of the services.
Likewise, it clarifies that compensatory payments resulting from exceeding the established margins may give rise to VAT obligations, provided that they form part of a genuine intra-group agreement based on objective economic criteria. For multinational groups, this means strengthening the traceability and substance of their internal policies, ensuring that their operations can withstand both Transfer Pricing and VAT compliance reviews.
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Source: TPCases