The realm of multinational enterprise (MNE) groups is increasingly characterised by intercompany transactions designed to align with the arm's length principle. This principle aims to prevent artificial profit shifting and ensure that related-party transactions are carried out at prices comparable to those charged between independent entities.
Unlike the arm's length principle which is a cornerstone in Transfer Pricing (TP), there is no straightforward application of Value Added Tax (VAT) principles to related party transactions either in the EU VAT Directive or the Council Implementing Regulation.
Transfer pricing vs VAT - different objectives
The fundamental difference between transfer pricing and VAT lies in their differing objectives:
- Transfer pricing focuses on the economic profit allocation across MNE based on functions, assets, and risks.
- VAT focuses on the value exchanged in a specific transaction between two parties, and the taxable event.
This article aims to clarify the VAT treatment of intra-group services considering recent case law of the Court of Justice of the European Union (CJEU) interpreting the concept of supply for consideration and input VAT deduction under the EU VAT Directive.
Supply of services for consideration: what are the determinants?
When it comes to VAT, a supply of services (i.e. a transaction that is not a supply of goods) is taxable only if there exists a legal relationship between the provider and the recipient of services that establishes a mutual exchange of performances. In other words, for a supply to be taxable, a direct link must exist between the services provided and the consideration received. The European Court of Justice has highlighted that for VAT purposes, consideration for a service is the subjective price actually paid, not the objective market value.
In general, the consideration for a service is the subjective price actually paid, not the objective market value.
However, Article 80 (1) of the EU VAT Directive allows the member states to use "open market value" as a taxable value in transactions between related parties if the consideration is above or below the market value, provided that this provision is enacted in national law and is aimed at preventing tax evasion and avoidance.
The Estonian Value Added Tax Act (VATA) prescribes that market value shall be used as taxable value when the recipient or the provider of services can´t fully deduct input VAT. The commentaries to the VATA further clarify that market price is applied to prevent tax evasion or avoidance. Therefore, in Estonia, the usage of open market value as consideration for VAT is allowed, but only in limited situations.
Complex services and taxable value: court decisions clarify VAT treatment
When open market value is applied in transactions between related parties, comparables must be determined in the member state where the service is taxed. If no comparables can be found, the taxable value defaults to full cost. Therefore, the more complex and specific the service, the greater the likelihood that full cost will be the taxable value for VAT.
The more complex and specific the service, the greater the likelihood that full cost will be the taxable value for VAT.
In Högkullen AB (C-808/23), the CJEU decided that intra-group management services – such as business management services, financial services, IT and staff administration services, real estate management services, investment services - must be assessed individually, even when provided together, to see if comparable transactions exist. Following this decision, taxpayers need to determine whether open market value should be based on comparable transactions for each component of the service as per § 12(16) of the VATA or on the total cost of the taxable person providing the service, as outlined in § 12(17)2) of the VATA.
Transfer pricing adjustments: a supply of services for consideration?
The question on the application of VAT also arises in case of retrospective transfer pricing adjustments for direct tax purposes. These adjustments may potentially alter initial VAT consideration, raising the fundamental question whether such adjustments may constitute supplies of services for consideration.
In SC Arcomet Towercranes SRL (C-726/23), the CJEU clarified that remuneration for intra-group services - like adjusting operating profit margins – can indeed be a consideration for a supply of services under VAT. This is true when the adjustment is contractually detailed and calculated according to the OECD guidelines “OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations“. The latter applies provided there is a direct link between the service and the consideration, and the service is clearly identifiable. If the payment is uncertain, this direct link breaks, placing the supply outside the scope of VAT.
This decision notably overturned the previously published discussion paper by the VAT Expert Group, which suggested that if the contract defines profit adjustments, the transaction is not a taxable transaction for VAT purposes if both parties are taxable entities with full input VAT deduction rights. Pending case Stellantis Portugal (C-603/24) may provide further guidance on VAT treatment for price changes aimed at achieving minimum profit margins. Advocate General’s opinion is expected shortly, on January 15th 2026.
Input VAT deduction principles
Under the principle of VAT neutrality, which also applies to intra-group services, input VAT can be deducted when there is a direct and immediate link between input and taxable output transactions and the expenditure incurred forms a price component of the output transaction or is a part of taxable person´s economic activity. Restrictions on input VAT deduction only come into play if the substantive conditions for deduction aren´t met, or if there´s fraud involved. To ascertain that all substantive conditions are met, the tax authorities can request additional evidence.
Restrictions on input VAT deduction only come into play if the substantive conditions for deduction aren't met or if there's fraud involved.
In Weatherford Atlas Gip SA (C-527/23), the CJEU decided that tax authorities can´t deny input VAT deduction based on their subjective assessment of the necessity or appropriateness of services. Moreover, input VAT deduction can´t be refused for intra-group services used for taxable transactions, even if these services are provided to multiple group companies simultaneously. However, tax authorities may ask for evidence under national law to confirm that the conditions for VAT deduction are met.
Practical considerations for multinational enterprises
The recent CJEU case law provides some clarity on intra-group services VAT treatment. Based on the above, the main takeaways for global businesses are the following:
A transfer price set to comply with the arm's length principle can still constitute actual consideration for a service for VAT purposes.
In domestic situations between taxable persons who are related parties:
- The supplier would be responsible for charging and remitting local VAT.
- The recipient may recover input VAT, subject to deduction rules.
- Late payment interest applies if VAT is not duly declared and paid.
In cross-border situations between taxable persons who are related parties:
- The reverse charge mechanism applies, and VAT is accounted by the recipient of taxable services.
- VAT treatment is governed by the place of supply rules.
- VAT deduction rules of the country of the recipient apply.
If open market value is used as consideration for intra-group services, each service component must be assessed separately to determine the basis of consideration.
Variable remuneration (e.g., profit margin adjustments) does not break the direct link if pricing rules are agreed in advance with precise criteria. In that regard, agreements concluded can serve as evidence that services and their pricing principles were agreed upon at the time of concluding the agreement.
Intra-group agreements should clearly outline the following:
- Pricing mechanism
- Nature of services
- Possibility of year-end TP adjustments
To establish VAT deduction rights, tax authorities can request documents beyond invoices to confirm the actual receipt and use of services for the taxable person's VAT taxable transactions, especially if invoice details alone are insufficient.
