The Arcomet ruling’s impact on Swiss multinationals

The Arcomet case: A Summary

The Arcomet case involved a Belgian parent company, Arcomet, which provided central commercial and management functions for its Romanian subsidiary. These services included negotiating supplier contracts, fleet management, strategic planning, and procurement services. The Romanian subsidiary operated locally, purchasing or renting cranes and subsequently selling or renting them to customers.

To ensure the subsidiary’s operating margin remained within an arm’s-length range, the parent company issued an annual settlement invoice to reconcile the ex-ante and ex-post application of the TNMM.

The CJEU made two critical findings in its judgment:

1. VAT applicability to TP adjustments: Settlement payments calculated using a TP method (such as the TNMM) may be subject to VAT if there is a clear and direct link between the payment and the services provided, and if both parties have reciprocal obligations.
2. Documentation requirements: Tax authorities may require more than just invoices as evidence. They can request operational documentation to verify that services were provided and used for taxable business activities.

Why does this matter for VAT compliance?

As CJEU rulings are binding across all EU Member States, the Arcomet decision has significant implications for cross-border intra-group transactions.

In practice, this means that in cross-border scenarios, the recipient of the service is generally required to self-account for VAT under the reverse charge mechanism, based on the taxable value of the transaction. However, the recipient’s ability to recover this VAT depends on two key factors:

• Whether the acquired services are used for the recipient’s taxable business activities.
• Whether sufficient documentation exists to substantiate the use of these services.

Failure to comply with these principles can lead to non-compliance, resulting in irrecoverable VAT costs, interest, and penalties. 

Extending the Arcomet ruling to other TP methods

While the Arcomet case specifically addressed the TNMM, its principles can be applied to other TP methods, such as the profit split method, as well as non-transactional profit repatriation arrangements like VBFs.

The CJEU emphasized that for a payment to fall within the scope of VAT, there must be a legal relationship between the service provider and the recipient, characterized by reciprocal obligations. In the Arcomet case, the parent company provided commercial services and assumed economic risks, while the subsidiary agreed to pay an amount based on its operating profit margin. This mutual commitment satisfied the requirement for a legal relationship with reciprocal performance.

This reasoning can be extended to other arrangements and pricing mechanisms. For instance:

• Under the profit split method, allocations between affiliated entities are typically based on their respective risk and functions .
• In VBF arrangements, contracts often reflect the value created by the entrepreneur for the benefit of a less complex affiliate (e.g., one that assumes limited or no risks, often referred to as the “tested party” in TP terminology).

Such agreements may meet the criteria for reciprocal obligations, indicating that payments under these arrangements could also fall within the scope of VAT, provided other conditions are met.

Beyond the existence of a legal relationship, the Arcomet ruling underscores the importance of additional factors when assessing the VAT treatment of TP adjustments under any TP method, including:

• The direct link between the service provided and the consideration paid.
• The economic and commercial reality of the arrangement.
• The nature of the remuneration (e.g., fixed, variable, not voluntary nor uncertain).

Practical steps for Swiss multinationals to mitigate VAT risks

For Swiss-based groups that centralize management or commercial functions and use TP settlement mechanisms—such as settlement invoices, profit split arrangements, or VBFs—with EU subsidiaries, the Arcomet ruling has direct implications. For example, if a Swiss entity issues invoices for services (including TP adjustments or settlement invoices) to EU VAT-registered affiliates, the latter  must ensure compliance with the Arcomet ruling, accurately report VAT in the relevant jurisdiction, and maintain appropriate supporting documentation.

To mitigate VAT risks, Swiss MNEs should consider the following practical steps:

• Review intercompany service agreements: Ensure agreements with settlement clauses or other TP methods clearly describe the services performed and the settlement procedures.
• Update invoice templates: Verify that invoices meet formal VAT requirements in the relevant jurisdictions.
• Maintain robust operational evidence: Retain and organize documentation such as activity reports, procurement files, time logs, third-party agreements, and board minutes to demonstrate a direct link between services provided and taxable outputs.
• Prepare for audits: Develop a comprehensive documentation pack (defense file) to substantiate how inputs are tied to taxable business activities.
• Conduct VAT risk assessments: Perform country-specific VAT risk reviews, particularly in jurisdictions where settlements are frequent or material. Consider seeking advance rulings for significant cases.
• Educate internal teams: Train finance and tax teams on the formal conditions for input VAT recovery and the importance of maintaining adequate operational documentation.

For further guidance on how the Arcomet ruling may impact your business, or to discuss how to strengthen your VAT compliance framework, please reach out to our team of experts.