Transfer pricing - Germany

• Germany follows the definition of the arm’s length principle stipulated in Article 9 of the OECD Model Tax Convention. For the application of the arm's length principle, it must be assumed that the parties are aware of all material circumstances of the business relationship and act in accordance with the principles of proper and conscientious business managers.
• In the German tax legislation, the arm’s length principle is defined in § 1 Foreign Tax Act. Further, the following provisions of the national legislation are particularly relevant from the transfer pricing perspective for companies operating in Germany:
  • Constructive dividend, § 8 (3) Corporate Income Tax Act
  • Hidden capital contribution, § 4 (1) Income Tax Act and § 8 (1) Corporate Income Tax Act
  • Contribution or withdrawal, § 4 Income Tax Act (for partnerships)

Further clarifications to these legal provisions are provided in ordinances of the German Federal Ministry of Finance, e.g. Ordinance on the documentation of profit allocations (Gewinnabgrenzungsaufzeichnungsverordnung), Business function relocation ordinance (Funktionsverlagerungsverordnung), Ordinance on the allocation of profits of permanent establishments (Betriebsstättengewinnaufteilungsverordnung).

• The transfer pricing rules apply to German taxpayers, including German branches of foreign companies. For permanent establishments basically the Authorized OECD Approach applies, however, with some important particularities.
• The transfer pricing rules apply to business transactions between associated enterprises. Enterprises are associated to each other if one has a direct or indirect interest in the other of at least 25% of the subscribed capital, membership rights, participation rights, voting rights or assets (substantial interest) or if a third person has a substantial interest in both. In addition to that, two enterprises are also associated if one is able to exercise directly or indirectly a controlling influence on the other (or a third person on both), or one is able to exercise an influence over the other in agreeing the terms of a business relationship, that is based outside that business relationship, or if one of them has an own interest in the other obtaining income.

• Germany is a member country of the OECD. The OECD Guidelines do not represent mandatory law in Germany, but the national tax legislation is considered – by German fiscal authorities – to be consistent with them. The OECD Guidelines are therefore referred to by taxpayers, tax authorities and courts, as far as domestic regulations contain no respective provisions.
• The Federal Finance Ministry’s Circular of 14.07.2021 ('Administrative Principles Governing Transfer Pricing') makes direct reference to the OECD Guidelines – thereby making it an integral part of this circular – to ensure an international orientation of the German transfer pricing practice and alignment with the OECD Guidelines and to ensure an internationally uniform implementation of the arm's length principle. Nevertheless, according to this circular, Germany may deviate from or determine specific interpretations of the OECD Guidelines on certain topics.

• The arm's length price shall generally be determined using the most appropriate transfer pricing method with respect to the comparability analysis and the availability of comparable values. Differences between the uncontrolled transactions used for the arm's length comparison and the controlled transaction, which may affect the application of the transfer pricing method, shall be eliminated by appropriate adjustments where possible. If no comparative values can be determined, a hypothetical arm's length comparison shall be carried out for the determination of the arm's length price from the perspective of the supplier and the respective service recipient using economically recognised valuation methods.
• Therefore, all transfer pricing methods stipulated within the OECD Guidelines are accepted in Germany. Section 2.3 of the OECD Guidelines should be considered when selecting the most appropriate transfer pricing method.

• No self-assessment-regime in relation to transfer prices.

• German transfer pricing documentation requirements with respect to Master File and Local File are included in § 90 (3) of the German Fiscal Code.
• Transfer pricing documentation must be presented upon request of the tax authorities, typically in the course of a tax audit. The time limit for presenting the documentation is 60 days from the request. This may be reduced to 30 days based on recent Draft Bill. Specific rules apply to extraordinary business transactions, e.g. restructurings, relocation of functions, changes to material long-term agreements. The taxpayer is required to prepare transfer pricing documentation of such transactions in a contemporaneous manner. If the documentation is prepared at the latest six months after the end of the fiscal year, in which the transaction has been conducted, the documentation is deemed to be prepared contemporaneously. Transfer pricing documentation of extraordinary business transactions must be presented to the tax authorities within 30 days upon their request. Extensions of these deadlines may be granted for specific reasons.
• Transfer pricing documentation must be presented in German language. However, the taxpayer can apply for the use of another language, usually English. Such application should be filed with the competent tax authority immediately after receiving the request for presenting the transfer pricing documentation. If an application is made later and denied by the responsible tax auditor, the tax auditor is not obliged to provide additional time for preparing the translation.
• Apart from the special rules for extraordinary transactions, there is no strict legal requirement to prepare or update transfer pricing documentation on an annual basis or by specific dates. As transfer pricing documentation (Local File) is usually requested during a tax audit, the documentation file may cover all years of the respective audit period and does not need to be provided on an annual basis. The relevant financial data must however be documented on an annual basis, e.g. transaction volumes, segmented profit and loss data, and financial data used to calculate the transfer prices. Accordingly, there is no strict rule for updating benchmark analyses. In practice, benchmark analyses are updated every three years supplemented by annual financial updates according to the guidance in section 5.38 of the OECD Guidelines.
• The documentation requirements only apply to cross-border transactions. Domestic transactions are not covered.
• Rules regarding preparation of CbCR are contained in § 138a of the German Fiscal Code. CbCR requirements apply to corporate groups having total revenues of EUR 750 million or more.
• In addition to these documentation requirements, the parties to a controlled business transaction – explicitly including the party located outside Germany – are obliged to cooperate and clarify any circumstances and procure the necessary evidence relating to this transaction (§ 90 (2) of the German Fiscal Code). In doing so, they shall exhaust all legal and practical means available to them. Therefore, depending on the case, the German taxpayer in the structuring of his business relations must obtain or allow himself to be granted the opportunity to procure, retain and present the necessary explanations and evidence, even if such explanations and evidence are located outside Germany.

• Germany has implemented BEPS Action 13 'Guidance on Transfer Pricing Documentation and Country-by-Country Reporting'.
• A Master File must be prepared by a German taxpayer if the revenue in the preceding fiscal year exceeded EUR 100 million. A Local File must be prepared by a German taxpayer if the total cross-border intercompany supply transactions exceed EUR 6 million or if the total amount of all other cross-border intercompany transactions exceed EUR 600 thousand. Transactions pertaining to German entities that belong to the same group (in the meaning of sec. 18 of the German Stock Corporation Act) are aggregated in regard of these thresholds. Different from this there is no transaction specific threshold.
• The required content of Master File and Local File in Germany basically corresponds to the OECD Guidance. However, the Local File requirements slightly differ from the OECD template. In particular, the taxpayer must document the date when transfer prices have been determined (price-setting approach) and record any information available at that time and used to determine the transfer price. In addition, specific requirements apply to intentional set-offs, cost sharing or cost contribution arrangements, losses, transfer price adjustments, functional changes in relation to research and development activities, and rulings, mutual agreement or arbitration procedures.

• Ongoing loss-making situations (more than 3 consecutive years)
• Business restructurings / Relocation of functions
• Financing transactions
• Management fees / Headquarter services / Cost allocations
• Transfer and licencing of (hard-to-value) intangibles
• Missing arm’s length analysis and documentation
• Controlled transactions involving low tax jurisdictions / blacklist countries

• If the taxpayer fails to submit transfer pricing documentation for a business transaction in accordance with § 90 (3) of the German Fiscal Code or if the submitted transfer pricing documentation is essentially of no use or if transfer pricing documentation of extraordinary transactions was not compiled in due time, it shall be rebuttably presumed that the taxable income in Germany from this transaction is higher than the declared income. If in such cases the tax authority must conduct an estimate and if this income can be determined only within a certain range, then the unfavourable limit of that range may be selected to the detriment of the taxpayer. The taxpayer has the possibility to rebut this presumption (shift of burden of proof).
• If a taxpayer fails to submit transfer pricing documentation for a business transaction, or if the transfer pricing documentation submitted for a business transaction is essentially of no use, a penalty of 5,000 euros shall be imposed. The penalty shall be at least 5 percent and at most 10 percent of the additional income that results from the income estimation, if this leads to a penalty of more than 5,000 euros. In cases where usable records are submitted late, the penalty shall total up to 1,000,000 euros, and shall be at least 100 euros for each full day following the expiration of the deadline. These penalties generally apply per transaction.
• If a CbCR is not submitted, incomplete, or submitted late a penalty charge in the amount of up to EUR 10,000 can be raised.

• Mutual agreement procedures are available under a double tax treaty, or the EU Arbitration Convention (90/436/EEC) or the implementation of the EU Directive on Tax Dispute Resolution Mechanisms (EU-Doppelbesteuerungsabkommenstreitbeilegungsgesetz).
• The taxpayer must be eligible under one of these legal bases to request a MAP. The case must be presented to the tax authority within the deadlines prescribed by the relevant legal basis, in most cases three years from the first notification to the taxpayer of the actions giving rise to the MAP. A formal request includes a description of the facts and a legal assessment. MAP requests are accepted in the case of a taxpayer-initiated foreign bona fide adjustment.
• The German competent authority for Mutual agreement procedures is the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt). MAP applications can also be filed with the local tax office.
• The MAP application is not subject to a fee.

• The German tax authorities may participate in coordinated tax audits. The main aim of coordinated tax audits, which covers both simultaneous tax audits (simultaneous tax examinations) and joint tax audits, is to achieve consensus when determining the relevant facts with the participation of foreign officials during the audit.
• Coordinated tax audits are initiated by the tax authorities. The tax office responsible for the tax audit decides which cases to propose for a coordinated external audit and for what reasons, and also decides whether it will participate in a coordinated tax audit proposed by another state.
• The taxpayer must be consulted. The taxpayer may lodge objections to the proposed coordinated tax audit with the German tax office responsible for the tax audit, and in specific cases, with the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt). The taxpayer cannot apply for a coordinated tax audit. If the taxpayer wishes to initiate a coordinated tax audit, this would only be possible in coordination with and via the responsible tax office.
• The BZSt is the competent authority for administrative assistance in tax matters. The BZSt receives proposals for coordinated external audits from foreign tax administrations and sends the German tax administration’s audit proposals to foreign tax administrations. The BZSt reviews the legal permissibility of incoming and outgoing audit proposals.
• Moreover, the BZSt decides about objections of the taxpayer and communicates the outcome to the taxpayer and the competent tax office. If the BZSt considers the taxpayer’s objections to be justified, the coordinated external audit is not conducted. If the objections are considered unjustified, the taxpayer is informed in a timely manner.

• German members of multinational enterprises face a high probability of a tax audit. Usually, a tax audit covers a three- to four-year period on a continuous basis. It is very likely that transfer pricing issues are scrutinised during a tax audit.
• Within the German tax authorities, we see a growing specialisation of transfer pricing tax auditors on areas of special interest, e.g. financial transactions. Tax auditors place a lot of importance on formal requirements, the economic analyses, and on the completeness of the underlying legal documents (agreements, policies etc.).
• In many cases transfer pricing methods and comparable values used are challenged during a tax audit. In these cases, the tax authorities usually claim income adjustments based on their own methodology and estimates. The probability of ultimately defending the taxpayer’s position depends on the circumstances of the individual case. We see an increasing number of cases ending up in national appeal procedures and / or mutual agreement procedures.

• Germany fully implemented reporting obligations according to COUNCIL DIRECTIVE (EU) 2018/822 (DAC 6) of 25 May 2018 into national law including the specific hallmarks concerning transfer pricing.

• There is no specific law, circular or guidance published in Germany on the transfer pricing implications of the COVID-19 pandemic. Basically, the OECD guidance of 18 December 2020 should apply. Accordingly, taxpayers should review their transfer pricing schemes for adverse effects not only from the pandemic but also from other shocks like interruption of supply chains and rising inflation. Non-arm’s length outcomes of controlled transactions due to these developments may be challenged in a tax audit.
• Regarding APAs (in particular critical assumptions) German tax authorities follow a case-by-case approach and examine the impact of the COVID-19 crisis on the particular industry the taxpayer operates in.
• Administrative actions of the tax authorities continue, although there may still be delays. More and more tax audits are conducted remote and tax audit meetings are held via video conferencing platforms.