- 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.