How to mitigate potential VAT risks in intragroup transactions 

In recent years, tax authorities have increased the scrutiny on intragroup transactions within the banking industry. Recently, the Court of Justice of the European Union (CJEU) ruled in the Arcomet case¹  (Arcomet case) that intragroup payments, which also include transfer pricing (TP) adjustments, may be regarded as a supply of services for consideration subject to value added tax (VAT). 

This development reinforces the necessity for banks to assess their intragroup arrangements under both TP and VAT frameworks, which encompass not only the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration² (OECD TP Guidelines) and articles 132 and 135 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as subsequently amended (VAT Directive), but also local regulatory frameworks such as the Luxembourg CSSF Circular 12/552 on central administration, internal governance and risk management (CSSF Circular).

What can be defined as intragroup services?

Chapter VII of the OECD TP Guidelines provides guidance on what may be considered intragroup services, being services provided by one group entity to another, which are not reimbursed via cost contribution agreements but must be charged at arm’s length if they provide real economic benefit to the recipient.  Intragroup services are frequently relied on in the banking sector and cover activities such as treasury support, cashpooling, risk management, internal audit, information technology services, human resources functions and centralized procurement. 

According to Chapter VII of the OECD TP Guidelines, intragroup services must provide the beneficiary with real economic or commercial value to enhance or maintain its business position. This can be tested by considering if an independent party would be willing to pay for the same services. This benefits test is required to determine whether a service qualifies as an intragroup transaction. For banks, this is especially relevant as many support functions are centralized and shared across jurisdictions.

Accurately identifying intragroup services under the OECD TP Guidelines is critical - not only to ensure that transactions comply with the arm’s length principle from an income tax perspective, but also to assess their VAT treatment and satisfy regulatory expectations reinforced by the CSSF Circular. 

Interplay between VAT Directive, OECD Transfer Pricing Guidelines and CSSF Circular 

Intragroup transactions within banks are increasingly scrutinized not only from a tax perspective but also by regulators assessing internal governance and risk management. Banks therefore must ensure that they comply with the provisions of:

• The VAT Directive that determines when intragroup services qualify as a supply of services for consideration within the scope of VAT. While most banking activities are exempt from VAT, ancillary or support services (such as IT risk management or compliance support) provided to banks often are not. This misalignment can result in unrecoverable VAT costs or adjustments.
• The OECD TP Guidelines that provide guidance to establish whether an intragroup transaction has economic value and is remunerated at arm’s length. A robust TP analysis – covering both functional and economic assessments - underpins compliance with direct tax rules and supports accurate VAT treatment. Any inconsistencies between TP documentation and VAT positions may trigger inquiries by tax and regulatory authorities.
• The CSSF Circular that requires Luxembourg banks to maintain proper governance, economic substance, and documentation for any outsourcing or intragroup arrangements. It ensures that transactions are economically justified, controlled, and appropriately priced, reinforcing both TP and VAT compliance. 

Together, these frameworks create a cohesive and integrated compliance ecosystem.

How TP can support the VAT analysis 

Under the VAT Directive, a range of banking and insurance transactions are exempt from VAT. 

These exemptions cover core activities such as insurance and reinsurance services and credit-related operations such as granting and negotiating loans. They also extend to banking transactions, from deposits and current accounts to payments, transfers, and negotiable instruments, though debt collection remains outside the scope. Finally, dealings in legal tender -such as currency, banknotes, and coins - are exempt.

Why is TP essential for VAT analysis? 

A key challenge in the VAT treatment of intragroup services within banking groups is that the VAT Directive does not provide a sufficiently detailed definition of what constitutes a “transaction”, “related services”, or “financial intermediation”. This ambiguity can lead to divergent interpretations by tax authorities regarding whether an intragroup service is subject to or exempt from VAT. 

TP analysis and guidance are critical to address this gap. The OECD TP Guidelines offer a comprehensive international framework for identifying, characterizing, and delineating intragroup transactions. Rather than focusing solely on form, the Guidelines emphasize substance, risk and assets – examining the commercial rationale behind a transaction, the functions performed, the assets employed, and the risks assumed. They also require determining whether a service is actually provided, assessing who benefits from it and considering whether an independent party would be willing to pay for such services.  

TP plays a crucial role in resolving the ambiguity that often arises under VAT rules. While the VAT Directive defines the exemptions, it is TP delineation that determines the true nature of the underlying activity, identifies the beneficiary, and confirms whether an intragroup service exists. Accurate delineation ensures alignment between TP and VAT outcomes, providing a defensible position in the event of scrutiny by tax authorities.  By applying the OECD TP Guidelines, banks can reduce the risk of misclassification, prevent VAT leakages, and maintain consistent treatment across jurisdictions.

Challenges and mitigation strategies from a TP perspective

Delineation is only part of the challenge - banks also face a range of additional risks linked to intragroup services and their VAT implications. From a TP perspective, several key issues stand out. 

First, scrutiny from tax authorities is intensifying worldwide, with particular focus on intragroup services, year-end TP adjustments and whether such payments represent taxable supplies for VAT purposes rather than simple cost allocations, as illustrated by the Arcomet case.
To mitigate this risk, banks should prioritize transparency through well-drafted service agreements and maintain clear evidence of the direct link between services provided and the consideration paid. 

Another challenge lies in reconciling economic substance with the legal form. Shared services centers or treasury hubs within banking groups often carry out activities that resemble internal overheads or shareholder functions. When such services are charged intragroup, tax authorities may challenge whether an independent enterprise would have paid for them (the TP benefits test) and whether a genuine supply exists for VAT purposes. Aligning the economic substance of these activities with both VAT and TP documentation is essential to demonstrate that charges reflect real, value-creating services and withstand regulatory scrutiny.

Documentation remains a critical area of risk. TP compliance requires functional analysis, appropriate comparability methods and robust documentation, as emphasized in Chapter V of the OECD TP Guidelines. VAT rules demand that service recipients demonstrate a direct link between the services obtained and taxable transactions. A coordinated governance framework, where TP and VAT teams align data, documentation and narrative helps maintain consistency and strengthens defensibility. Leveraging AI tools for compliance monitoring and anomaly detection can further enhance this process. 

Finally, banks often centralize treasury, risk management, compliance, IT and other functions, creating overlap between cost-sharing arrangements and intragroup service charges. Determining whether those functions justify intragroup service charges - and how they should be treated for VAT purposes - requires careful analysis. OECD Guidelines (Chapter VIII) on cost contribution arrangements may apply, and some services may be partially linked to VAT-exempt banking activities, creating claw-back or non-deductibility risks. Conducting a detailed service-by-service assessment enables banks to distinguish taxable from exempt supplies and apply the correct VAT treatment. 

Looking ahead

Intragroup service arrangements lie at the intersection of TP and VAT - two distinct regimes with different objectives but with overlapping risk areas. For TP, the challenge consists in meeting the arm’s length principle, applying the benefits test and ensuring accurate cost allocation. VAT compliance in turn demands correct classification of services, proper invoicing, and accurate deduction handling.