Year-End Adjustment Quo Vadis?

Transfer pricing systems of multinational corporations are often set up in such a way that the profitability of a respective routine company (e.g. distribution or manufacturing companies with a limited function and risk profile) is controlled and adjusted based on a range of arm's length net margins. The range is usually determined by a benchmark analysis.

If the net margin of a routine company at the end of the year falls outside the range determined by a benchmark analysis, a year-end adjustment (YEA) is a key control instrument for bringing profits back into line within the arm's length range. This is usually done either by means of balance sheet adjustments (that is, based on receivables and liabilities to the related party) or off-balance sheet adjustments (that is, under German law, for example, by means of adjustments for hidden profit distributions, hidden contributions, or income adjustments in accordance with Section 1 of the German Foreign Tax Act (Außensteuergesetz, AStG)).

Furthermore, a YEA has implications for value-added tax (VAT) and customs law. Consequently, reporting obligations must also be taken into account if the transfer prices set during the year for the respective intra-group transaction (usually the intra-group supply of goods or services) are retroactively increased or reduced.

In Germany, the acceptance of YEAs was controversial for a long time and regularly led to heated discussions with the tax authorities, particularly when the tax base in Germany was to be reduced by the YEA. According to the outdated administrative opinion, retroactive transfer pricing adjustments were only accepted if the specific structure of such a YEA had been contractually agreed in advance. Since the introduction of the new administrative principles for transfer pricing (Federal Ministry of Finance (BMF), 14 July 2021, IV B 5 - S 1341/19/10017:001), the previously applicable approach has been effectively reversed, meaning that YEAs are now generally accepted even without contractual agreements.

In some countries, YEAs are still viewed critically and are often not accepted or lead to considerable effort in terms of implementation.

In practice, implementing YEAs—i.e., bringing the excess profits of a (from a German perspective) foreign routine company to an arm's length level—is often problematic. A possible solution to this problem is provided by the preliminary ruling of the Court of Justice of the European Union (CJEU) in the SC Arcomet Towercranes SRL case of 4 September 2025 (Ref. C-726/23).

The Arcomet Group is represented in Romania by its own distribution company. This company receives services (strategy and planning, negotiation of (framework) agreements with third-party suppliers, etcetera) from its direct parent company in Belgium. Arcomet Romania, in turn, has committed itself to operate in the local market and to carry out all necessary activities for this purpose. For this, Arcomet Romania is remunerated on the basis of the transactional net margin method (TNMM) described in the Organisation for Economic Co-operation and Development (OECD) guidelines.

It has been contractually agreed between the two companies that if Arcomet Romania's net margin falls outside the range (in this case between -0.71 percent and 2.74 percent), a payment will be made at the end of the year. In the present case, Arcomet Romania's net margin was above this range every year. Each year, the Belgian company issued a corresponding invoice for the contractually listed services in the amount of the necessary adjustment.

Arcomet Romania treated the services shown on the invoices as VAT-liable services for which it applied the reverse charge procedure. Similarly, Arcomet Romania made use of the input tax deduction, meaning that no VAT liability remained in Romania.

However, the Romanian tax authority refused to allow the input tax deduction. The refusal to allow the tax deduction was justified in particular on the grounds that the compensation payments invoiced were merely a means of adjusting the net margin of the Romanian company, without any connection to a specific service provided by the Belgian company.

The interesting question from a transfer pricing perspective was whether the amounts invoiced could actually be classified as consideration for a service subject to VAT. The CJEU answered this question in the affirmative. The CJEU confirmed that there was an exchange of services, which meant that the payment made at the end of the year was subject to VAT. The reason for this was the clear contractual agreement between the group companies involved, in which the services to be provided were specifically defined. It was irrelevant that the remuneration for the service was variable in line with the margin achieved by Arcomet Romania.

The Arcomet case raises the question of the necessity of conventional YEAs. It would therefore be worth discussing whether, in addition to any existing goods delivery transaction, a service agreement could be established whose remuneration, as in the Arcomet case, would be variable.

Ultimately, it might then no longer be necessary to adjust the transfer prices for the actual intra-group goods transaction, but rather to apply the TNMM method by means of a variable service fee. The associated potential consequences in terms of VAT and customs law may be easier to map.

We therefore recommend that clear, precise, and above all, written contracts be concluded for such transactions between related parties, which clearly define both the content of the service and the calculation of the remuneration. Unclear or missing agreements can lead to misunderstandings, which entail associated tax risks.