Transfer Pricing (TP) and Value-Added Tax (VAT) are integral components of international tax frameworks, frequently intersecting in complex ways. For organisations with cross-border intra-group operations, understanding the interactions between these two sets of rules is important for ensuring compliance and managing associated risks. This article examines the interaction between TP and VAT, utilising recent case law and practical examples to illustrate relevant issues and established practices.
Understanding TP and VAT
TP refers to the regulations and methodologies for determining prices in transactions within and between entities under common ownership or control. The principal objective is to ensure that such transactions are priced at arm's length, mirroring those that would occur between independent entities in comparable situations. This promotes an appropriate allocation and taxation of profits where economic activities occur.
VAT, by contrast, is an indirect tax on the consumption of goods and services, levied at each stage in the production and distribution chain. While EU Member States generally follow harmonised VAT rules, individual states maintain national regulations and administrative practices.
Where TP and VAT Meet
Though TP and VAT constitute distinct areas within taxation, they converge, particularly concerning cross-border transactions. This convergence can result in complexities, as the underlying principles and aims of TP and VAT may at times diverge. Adjustments to TP intended to adhere to arm’s length standards may have VAT implications, potentially resulting in additional liabilities or disputes.
Several cases referred to the Court of Justice of European Union (CJEU)
Recent court cases demonstrate the challenges involved in aligning TP policies with VAT requirements, highlighting the significance of robust documentation and ongoing compliance.
In the Arcomet case (C-726/23), a Romanian subsidiary and its Belgian parent company disputed whether amounts invoiced between affiliates for profit alignment—using the transactional net margin method in line with OECD Guidelines—constituted payment for VAT-liable services. Romanian authorities classified these invoices as service payments subject to VAT under the reverse charge mechanism and denied the input VAT deduction due to insufficient supporting documentation. In the judgment released on 4 September 2025, the CJEU confirmed that intra-group services for a transfer price may qualify as taxable supplies if there is a legal relationship involving reciprocal performance. The right to VAT deduction hinges on adequate transaction documentation, which must be demonstrated by the taxable party.
In the Weatherford case (C-527/23), Romanian authorities again declined input VAT deductions on services acquired from related group companies, arguing these were not directly linked to the company's taxable activities. On 12 December 2024, the CJEU determined that denying VAT deduction, based on an authority’s subjective assessment of service necessity, contravenes the principle of VAT neutrality if the services are used for taxable purposes. This emphasises the importance of documenting a direct link between acquired services and taxable transactions, which can be substantiated through consistent TP supporting materials.
The Högkullen case (C-808/23) addressed a Swedish holding company providing intra-group services. The Swedish Tax Agency re-evaluated the taxable amount, contending that consideration received was below open market value and that "shareholder costs" should be included as part of a single complex supply. On 3 July 2025, the Court concluded that Articles 72 and 80 do not allow automatic treatment of all parent-to-subsidiary services as a single supply; each service requires individual assessment regarding comparable open market services. This case underscores the need for detailed examination when establishing the taxable base for VAT and raises questions about the equivalence between "open market value" in Article 72 of the EU VAT Directive and the arm’s length standard.
In the Stellantis Portugal case (C-603/24), a Portuguese company’s vehicle purchases and resales became the subject of debate over whether price adjustments for repairs, warranties, and roadside assistance should be considered as supplies of services for VAT purposes. The Portuguese authorities sought to impose additional VAT on such adjustments, prompting a preliminary reference to the CJEU on 16 September 2024. This illustrates the difficulties in defining the VAT treatment of TP adjustments, highlighting the necessity for clear contractual agreements and supporting evidence.
Best practices for ensuring TP and VAT alignment
Because of the identified complexities, it is advisable for businesses to implement processes for effective management of TP and VAT alignment:
- Maintain comprehensive and consistent documentation—including intercompany agreements and TP files—that reflects the true nature of transactions;
- Conduct thorough functional and economic analyses, detailing business value drivers, roles, and risks undertaken by each entity;
- Ensure that legal agreements are consistent with actual business conduct;
- Regularly review and adjust transfer prices to maintain alignment with both TP and VAT standards, documenting any changes along with supporting contracts, invoices, activity reports, and other records that establish the connection between purchased services and taxable outputs; and
- Monitor regulatory developments and coordinate responses to tax authority queries at the group level, adopting a unified rather than isolated approach.
Conclusion
The interplay between TP and VAT represents a technically intricate element of international tax practice. Organisations must manage these dynamics to achieve compliance and reduce risk. As legislative measures evolve to address tax avoidance and fraud, staying informed and maintaining robust documentation remains crucial for multi-jurisdictional operators. Implementing best practices enables effective management of TP and VAT relationships and helps mitigate potential challenges.
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