Germany
Oliver Biernat
by Oliver Biernat
Many foreign investors think that transfer pricing (TP) rules and documentation prepared for their home country can be used for their German subsidiary or permanent establishment. This is normally not the case. German tax authorities insist that transfer prices be determined, and, if necessary, also documented, according to special German rules.
a. Transfer pricing rules
The general arm’s length rule can be found in Section 1 of the AStG (Foreign Tax Code), stating that transfer prices must be created in a way independent third parties would have agreed on. Several ordinances, and especially the “Administrative Principles Transfer Pricing”, which are binding for the tax authorities but not for the taxpayer and the courts, provide a good insight into how you should proceed if you want to avoid conflicts with the tax authorities. All agreements between related parties should be in writing and signed by a legal representative of each party before they come into force.
b. Transfer pricing methods
Allowed are the CUP, resale minus method, cost plus method, TNMM, and, in special cases, profit split methods. It is obligatory to choose the most appropriate method and to justify your choice. Usually this should be done by conducting functional and risk analyses. For the cost plus method, a 5% margin is usually accepted. Quarterly adjustments when profit level indicators are out of the range of comparables are allowed and required.
c. OECD guidance
OECD Transfer Pricing Guidelines have not been implemented in German law but can provide some orientation in cases where there is no specific, prevailing German rule. The authorised OECD approach for the attribution of profits to permanent establishments is only applied in cases with OECD countries, or when the double tax treaty (DTT) contains the new Article 7 of the OECD MTC 2010 and later.
d. Reporting requirements
Taxpayers must provide information and documents in order to clarify matters relevant to taxation, even if this information is only available abroad. As of now, the tax authorities only ask for TP documentation within a tax field audit. The deadline to submit is 60 days, and 30 days in case of extraordinary business transactions.
For fiscal years starting after 31 December 2024, or in cases where a tax field audit has been announced after 31 December 2024, the tax authorities can also ask for TP documentation for all prior years at any time, and the deadline will be 30 days in any case.
As the 30- and 60-day deadlines are usually not sufficient for the preparation of TP documentation, it is recommended to prepare it once the thresholds are exceeded and update it whenever there are material changes, and at a minimum, at least annually.
a. Preparation of transfer pricing documentation
How to document transfer prices is outlined in Section 90a para 3 of the general tax code and in the profit accrual recording ordinance (GAufzV). “Small entities” do not have to prepare and submit transfer pricing documentation, but instead must present all underlying business papers related to the transfer price was determined. However, transfer prices of small entities will still be checked by the tax authorities.
The condition for a small entity is fulfilled if: i) the total of all revenue for the delivery of goods of all German entities of a group with related parties abroad does not exceed EUR 6 million; and ii) all revenue for services with related parties does not exceed EUR 600,000 per annum.
b. Master and German local file
All companies with related parties abroad that are not small entities as defined above must prepare a local file.
A master file must be prepared by companies with related parties abroad with a threshold on returns of EUR 100 million.
Local and master files must be provided in German, or, if it has been explained and accepted by the tax authorities beforehand, in another language. In the latter case, a translation into German may be required upon request, or in a case of domestic court procedures.
Country-by-country reports (CbCRs) with a threshold of EUR 750 million in the group financial statements will be accepted in English.
c. Penalties
In cases where the transfer pricing documentation is not provided or provided insufficiently, the authorities are able to estimate the respective income and assess surcharges. It is common that a tax auditor will state that the taxpayer has done something wrong, and will therefore estimate the profits in a percentage of the turnover.
If the taxpayer fails to cooperate with a qualified request for information, additional penalties may be assessed. In severe cases, and for larger companies with either more than EUR 12 million turnover, or companies that belong to a group with consolidated group turnover of at least EUR 120 million, the penalties can reach up to EUR 3.75 million.
The taxpayer should state all facts that are of tax significance for the agreement of terms and conditions for business transactions, in particular, transfer prices. In addition to the presentation of business transactions, the record-keeping obligation also includes the economic and legal basis for an arm's length agreement of conditions, in particular transfer prices, as well as information on the time of the transfer price determination, the transfer price method used, and the arm's length data used.
The taxpayer should prepare records for each business transaction in accordance with the transfer pricing method they have chosen, and use comparative data, to the extent available. This will include data on comparable business transactions which the taxable person or a person close to them has concluded with third parties, and on comparable business transactions between third parties. In addition, records must be kept of internal data that enable a plausibility check. The weighting of the functions exercised, the risks assumed and the material assets used by the taxpayer and their related parties must be consistent, and must be presented in a quantitatively comprehensible manner for each party involved in the business transaction.
There are bilateral and multilateral APAs as well as mutual agreement procedures and joint audits by tax authorities from several countries involved. An APA programme is in place in Germany whereby the duration of an APA is 5 years with rollback allowed.
In principle, the German tax authorities are hesitant to issue unilateral, advance tax rulings on transfer pricing issues. The tax authorities require very detailed documentation from the taxpayer to describe the specifics, and how they could be treated tax-wise from all points of view. A decision on how the taxpayer would approach a situation would be paid for by the taxpayer, and if the situation changes later on and the prerequisites under the advanced ruling were no longer met, the tax authorities argue that this would no longer be covered by the advance ruling. As a result of this lack of clarity, in 2019 for example, there were only 89 applications requests for APA procedures and only 25 completed APAs in Germany.
Oliver Biernat is Founder and Managing Partner of Benefitax. He is a German Chartered Accountant, Certified Tax Advisor and Specialist Advisor for International Taxation with more than 30 years of experience. Since 2008, he has chaired GGI’s International Taxation Practice Group (ITPG), increasing its size to more than 570 experts from 90 countries in the process. Contact Oliver.
GGI member firmBenefitax GmbH Steuerberatungsgesellschaft WirtschaftsprüfungsgesellschaftFrankfurt am Main, GermanyT: +49 69 256 227 60
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