Transfer Pricing 2021 Comparisons

Last Updated April 09, 2021

Contributed By Baker McKenzie

Law and Practice


Baker McKenzie is represented in 46 countries and has a leading global transfer pricing practice, providing clients with world-class service in all facets of transfer pricing. Supported by more than 240 advisers, lawyers and economists, the firm's transfer pricing team advises global companies on transfer pricing matters including design/planning, financial modelling, implementation, documentation, audit defence and litigation. It has extensive experience in competent authority procedures and has successfully accompanied and advised clients in numerous sizeable and high-profile advance pricing agreements and mutual agreement procedures. Baker McKenzie's economists specialise in transfer pricing and work in close co-operation with transfer pricing lawyers, providing economic modelling that takes into account specific transfer pricing requirements. Its transfer pricing experts have a unique awareness of international transfer pricing policy. As a law firm, Baker McKenzie's advice is legally privileged subject to local laws and regulations; its lawyers can litigate against tax authorities if disputes arise.

The German transfer pricing regime is characterised by the interplay of various statutory rules, case law and regulations. Chief among these are:

  • the rules on hidden profit distributions;
  • the rules on deemed contributions of capital; 
  • the rules on deemed withdrawals of assets from partnerships;
  • the rules on capital contributions to partnerships; and
  • Section 1 of the Foreign Tax Act.

Section 1 of the Foreign Tax Act (FTA – Außensteuergesetz) is, in practice, the most influential provision for transfer pricing adjustments. Section 1 of the FTA is supplemented by legislative regulations, in particular for questions regarding profit allocation to permanent establishments (BsGaV - Betriebsstättengewinnaufteilungsverordnung). Adjustments under Section 1 of the FTA will be made beyond – and further to – adjustments under other rules, such as constructive dividend principles (see Section 8, paragraph 3 of the Corporate Income Tax Act (CIT – Körperschaftsteuergesetz)).

In addition, the German Federal Ministry of Finance (BMF) has published several government pronouncements concerning transfer pricing. The most important administrative regulations have been updated recently and are the so-called Verwaltungsgrundsätze 2020. However, these are not legally binding for either taxpayers or courts.

Most notably, German transfer pricing law makes use of two standards: the arm's-length principle and the concept of the prudent and diligent managing director of an independent enterprise. In general, the classic arm's-length principle must be applied if empirical data to determine arm's-length prices is available (the "factual" arm's-length test). In contrast, the concept of the prudent and diligent managing director is used to obtain an arm's-length transfer price for intercompany transactions where empirical data is not available (the "hypothetical" arm's-length test).

The rules on deemed dividends date back to the post-war period, when Germany operated a classical corporate income tax system before the tax credit system of 1977, which was abolished as from 2001. Section 1 of the FTA was first introduced in 1972, aiming at establishing a domestic profit-adjustment provision in general but also as legal basis to implement the Article on Associated Enterprises (Article 9, OECD Model Convention) in existing double tax treaties. The rule has been subject to various changes since then.

  • As of 1992, a definition of covered related-party business transactions has been added.
  • As of 2003, this definition has been widened as a reaction to tax court rulings which stated that certain transactions (eg, provision of a guarantee by a parent company to the benefit of its subsidiary as substitute for equity) could not be subject to the profit-adjustment provision since these transactions were caused by the corporate relationship and did not constitute a business transaction; as a result of the new definition, a covered related-party business transaction is assumed if, amongst other things, it is based on a contractual relationship regardless of whether business or corporate interests have caused the transaction.
  • As of 2008, the terms "arm's-length principle" as well as "transfer prices" have been defined and specific rules dealing with the transfer of a function (see 3.1 Transfer Pricing Methods) have been introduced.
  • As of 2013, the application of the arm's-length principle has been extended to partnerships, as such, and the "authorised OECD approach" as regards the attribution of profits to a permanent establishment has been implemented.

In addition, the OECD's BEPS project has led to further tightening of the German tax and transfer pricing regime (see 9.3 Impact of BEPS).

The body of case law on substantive transfer pricing questions and, more recently, also on procedural questions has grown over the decades to become a significant body of precedents.

Future Changes

Please refer to the German Trends & Developments chapter in this Guide for potential legislative changes to the current transfer pricing rules.

German transfer pricing rules apply to controlled transactions between a taxpayer and a related party. Related parties and controlled transactions are defined by specific regulations.

Related Parties

The definition of a related party goes beyond mere group companies, family members and relatives. Based on statute, a related party can be any party that is in a position to exert influence on a taxpayer or that has a special interest in the income generated by the taxpayer going beyond a regular business interest. In practice, however, German tax authorities focus on transactions between group companies with direct or indirect shareholdings of at least 25%, as well as on transactions between members of a family.

Controlled Transactions

In a nutshell, all related-party transactions not based on the statutes of association between (direct and indirect) shareholder (or partner) and company (or partnership) are subject to the arm’s-length standard, regardless of whether the transactions are income or capital transactions.

Transactions between a head office and its permanent establishment (PE) are fully covered, whether they are explicitly declared as dealings or not. The term "dealing" refers to fictitious cross-border transactions between a head office and its PE.

German transfer pricing rules concerning the use of transfer pricing methods are generally in line with the OECD Transfer Pricing Guidelines. There are, in particular, two notable exceptions.

The Federal Tax Court has always regarded the neutralisation of profit manipulations as an application of law which is ultimately normative in nature rather than empirical or descriptive, respectively. Consequently, the Court has always reserved the right to modify or discard empirical findings about unrelated party behaviour. This is why the concept of testing a related-party transaction by reference to the hypothetical behaviour of the prudent and diligent managing director of an independent company (hypothetical arm's-length test) has played such a significant role.

Another particularity is the presumption, contained in Section 1 of the FTA, that an unrelated party has knowledge of all essential circumstances influencing the decision making of the other party.

Standard Methods

Section 1(3) of the FTA stipulates the priority of standard methods, which are the comparable uncontrolled price (CUP) method, the resale minus method and the cost plus method. If the data available is fully comparable with the tested transaction prices, the full range of these arm’s-length values is used. As the application of the CUP method requires very strong comparability, it is seldom applied.

Transactional Profit Methods

If fully comparable arm’s-length values cannot be determined, an appropriate transfer pricing method (which can be a non-standard method) must be based on partly comparable values. If this is the case, appropriate adjustments must be made, provided they improve comparability, and the resulting range of arm’s-length values must be narrowed down, usually to the interquartile range. If the actual transfer price is outside this range, adjustments are made to the median of the range.

Methods other than the standard methods accepted by German tax authorities are the transactional net margin method (TNMM) and the residual profit split method. Pursuant to administrative regulations, however, German tax authorities will only accept the TNMM if it is used in limited-risk "routine" transactions (eg, low-risk service provider or manufacturing activities). The residual profit split method is said to be accepted only where standard methods cannot be applied (reliably). The regulations illustrate this situation by reference to the global trading of financial products and, more generally, to the situation of two or more market-facing entrepreneurs making unique and valuable intangible contributions that are highly integrated.

"Hypothetical" Arm's-Length Range

If neither fully nor partly comparable arm’s-length values can be determined, the taxpayer must apply a "hypothetical" arm’s-length range. The range is derived from the maximum price acceptable for the payer (buyer) and the minimum price to be charged by the payee (seller). Once a range between maximum and minimum prices has been established, the price that is most likely to be at arm’s-length should be applied. The default value within the range is the midpoint value between the maximum and the minimum price.

Special valuation rules apply for determining a hypothetical arm’s-length price for the "transfer of a function" (business restructurings in OECD terminology). According to these rules, the hypothetical arm’s-length transfer price is determined as a "transfer package". The transfer package consists not only of the individual assets associated with the production and the sales or service function transferred, but also includes business opportunities, risks and potential location savings, as well as synergy effects.

Future Changes

Please refer to the German Trends & Developments chapter in this Guide for potential legislative changes to the current transfer pricing rules.

As stated in 3.1 Transfer Pricing Methods, priority must be given to the traditional transactional methods if fully comparable arm's-length values can be determined. However, this priority does not per se exclude the possibility of applying a different transfer pricing method. Moreover, if fully comparable arm’s-length values cannot be determined, an appropriate transfer pricing method (which can be a non-standard method) must be based on partly comparable values. The term "appropriate transfer pricing method" as used in the legislation is not further specified. Hence, the taxpayer may rely on unspecified methods but, if so, must expect increased scrutiny from the tax authorities and the necessity of providing evidence of its appropriateness.

Transfer pricing methods based on global profit allocation, such as the comparable profits method (CPM), are not accepted by German tax authorities.

In the absence of fully comparable arm's-length pricing data, there is no hierarchy of methods; see 3.1 Transfer Pricing Methods.

See 3.1 Transfer Pricing Methods.

Section 1 of the FTA requires appropriate adjustments to be made when using imperfect comparables if the adjustments increase the comparability in light of the functions performed, assets used and risks borne. In line with the legislative regulation, such adjustments must be documented. The administrative regulation further notes that transfer prices may be adjusted if the taxpayer does not make possible adjustments on partially comparable third-party data.

That being said, there are no precise rules on the calculation of comparability adjustments (eg, to ascertain levels of working capital/inventory or on the type of interest rate to use). In general, adjustments are stated to be acceptable and may be required if and to the extent they increase the comparability of the arm's-length values with the tested margins or prices.

German tax law has notable rules relating to the transfer pricing of intangibles.

Licence Barrier

In line with OECD BEPS Action 5, Germany introduced regulations on the limitation of the deduction of royalties (licence barrier), effective as of 31 December 2017. The statute is intended to focus on foreign "IP box" regimes incompatible with the OECD nexus approach. The licence barrier limits the deduction of licence fees as expenditure provided:

  • the licensor is a related party;
  • the royalty income of the licensor is taxed under a special regime deviating from the standard rules (preferential regime); and
  • the royalty income is subject to low taxation (below 25%).

Two major exceptions are made if the preferential regime is in line with the OECD nexus approach as set out in Chapter 4 of the BEPS 2015 Final Report on Action 5, or if income is subject to controlled foreign company taxation in Germany.

Transfer of Functions

Although German rules on transfer of functions are not specifically related to the transfer pricing of intangibles, they must be kept in mind if intangible assets are transferred abroad from Germany. See 3.1 Transfer Pricing Methods.


Section 1 of the FTA contains a German variant of the US commensurate-with-income standard. The rule applies to transfers of functions or business restructurings (see 3.1 Transfer Pricing Methods) and to regular/other intercompany transactions if they include transfers or uses of major intangible assets. An upward commensurate-with-income adjustment is made if the actual profit development departs significantly from the profit development forecast at the time of the transaction.

If, within ten years after the transaction, a significant deviation of profits occurs, the law provides for a one-time adjustment of the initial transfer price. The adjustment is made for the year subsequent to the deviation. A taxpayer can refute an adjustment by showing that unrelated parties would not have agreed on such an adjustment, although in practice such exculpation is often challenging.

According to the relevant administrative regulations, a deviation is treated as "significant" if the arm's-length transfer price calculated using the actual timeline of profits falls outside the arm's-length range calculated using the anticipated timeline of profits. The legislative regulations also permit a downward income adjustment to the benefit of the taxpayer. The commensurate-with-income rules will not be applicable if the parties agree on a profit or revenue-based licence fee.

Future Changes

Please refer to the German Trends & Developments chapter in this Guide for potential legislative changes to the current transfer pricing rules.

German transfer pricing law does not have additional special rules regarding hard-to-value intangibles. See 4.1 Notable Rules on rules relating to intangibles in general.

Cost sharing/cost contribution agreements are recognised in Germany. According to a circular letter issued by the Federal Ministry of Finance, as of 1 January 2019 the guidelines in Chapter VIII of the OECD Transfer Pricing Guidelines apply to the analysis of profit allocation resulting from cost sharing/cost contribution arrangements.

According to the position of the German tax authorities and as stipulated in the German administrative regulations, the scope of application of ex post transfer pricing adjustments is restricted to cases in which certain criteria are fully met. These criteria are that:

  • there was a prior agreement between the parties;
  • relevant pricing factors and calculation process were agreed upon in advance by the parties;
  • the transfer pricing adjustment results from an uncertainty with regard to one of the pricing components which was already given and recognised at the date of conclusion of the agreement (eg, development of reference interest rate of the ECB or development of oil price);
  • independent third parties would have agreed on such a transfer pricing adjustment in their business relationship; and
  • the transfer pricing adjustment does not relate to a mere adjustment of the result of one of the parties.

In practice, affirmative transfer pricing adjustments are often challenged by the tax authorities and require extensive defence.

Exchange of Information Based on Article 26 of the OECD Model Convention and Tax Information Exchange Agreements

Germany's extensive treaty network, currently consisting of more than 90 double taxation treaties, is largely based on the OECD Model Convention. Therefore, a lot of treaties contain provisions based on its Article 26. Moreover, Germany has concluded separate agreements with respect to legal and administrative assistance, including exchange of information with 27 countries (as of 1 January 2021).

Exchange of Information Based on EU Directives

Mutual Assistance Directive

The EU Mutual Assistance Directive (Directive 2011/16/EU) has been implemented in domestic German tax law (EU-Amtshilfegesetz). The supplement to the Directive provides for the automatic exchange of cross-border tax rulings on transfer prices and APAs between multinational companies. Tax rulings applying to individuals are excluded from the automatic exchange. In addition, the Directive as implemented in domestic German tax law also provides for a spontaneous optional exchange of information amongst EU member states if such information could be useful for the correct taxation of a taxpayer in an member state. If, for example, there are reasons to believe that tax evasion occurs, the spontaneous exchange of information is mandatory.

The German authority in charge of the exchange is the Federal Central Tax Office. In this function, the Federal Central Tax Office automatically provides certain information on tax rulings issued, changed or renewed starting on 1 January 2017 to the respective authorities of the EU member states (Receiving Authorities) and the European Commission. Receiving Authorities are entitled to request additional information about the respective tax rulings, including the full wording of the tax rulings. The European Commission receives a limited catalogue of information only.

The information to be exchanged must be submitted by the Federal Central Tax Office within three months from the end of the calendar year in which the tax rulings were issued, made, changed or renewed. The taxpayer will not be heard before providing the information.


The EU Directive on the obligation to report cross-border tax arrangements (DAC6) was implemented by the German legislature, with effect from 1 July 2020, in Sections 138d–138k of the German General Tax Act (AO – Abgabenordnung). Section 138e (2) no. 4a) - c) of the AO is of particular interest for transfer pricing and restructurings. Certain transfer pricing situations and restructurings are reportable regardless of whether their main objective is a tax benefit or not (main benefit test). Accordingly, the following are to be reported:

  • an arrangement which involves the use of unilateral safe harbour rules (No. 4a);
  • an arrangement involving the transfer of hard-to-value intangibles (No. 4b); and
  • an arrangement involving an intra-group cross-border transfer of functions and/or risks and/or assets, if the projected EBIT are less than 50% of the projected annual EBIT of such transferor or if the transfer had not been made.(No. 4c).

Nevertheless, other transfer pricing arrangements may also be reportable.

Directive (EU) 2020/876

The Directive (EU) 2020/876 allowed member states to extend the deadlines for initial notification by six months to avoid putting an additional burden on companies during the COVID-19 pandemic. However, Germany did not extend the deadlines. Therefore, a reporting deadline of 30 days applies to all reportable arrangements from 1 July 2020 (new cases). Old cases had to be reported by 31 August 2020.

To exchange the relevant information amongst member states, the reportable arrangements are to be recorded in a secure central directory to which the competent authorities of all member states shall have access.

Bilateral or multilateral advance pricing agreements (APA) are available, based on double-tax treaty rules for mutual agreement procedures (MAPs).

In principle, unilateral rulings as well as bilateral or even multilateral APAs are available in Germany. However, the Federal Ministry of Finance has issued administrative regulations stipulating that in cases where a double-tax treaty contains a clause on MAPs, the German taxpayer should not be granted a unilateral ruling. However, where no double-tax treaty exists, the tax authorities may, on request, provide the taxpayer with a unilateral APA, provided that the specific case is deemed appropriate and the taxpayer has a bona fide interest.

Germany's APA programme is heavily based on administrative regulations accessible at the Federal Central Tax Office's website.

Please refer to the German Trends & Developments chapter in this Guide for potential legislative changes with regards to APAs.

In general, the Federal Central Tax Office administers the APA process as the competent authority. APA requests have to be filed with the Federal Central Tax Office.

Currently, articles on MAPs in double tax treaties (Article 25, OECD Model Convention), are considered to be the legal basis for an APA from a German perspective. If Germany has concluded a double tax treaty including a MAP article with a foreign company's state of residence, an APA will only be issued to its German related entity if a mutual agreement between Germany and the foreign state has been concluded.

Coordination between APAs and MAPs generally has to be done on a case by case-basis.

See 7.5 APA Application Deadlines for further details on the co-ordination between APAs and MAPs in connection with a roll-back.

A third country, which was not party to the APA, might not recognise the outcome of the APA and might make profit adjustments which will result in double taxation. In such a scenario, the German Federal Central Tax Office will open a MAP with this country to resolve the double taxation whilst preserving the outcome of the APA.

Only persons who are entitled to the benefits of a double tax treaty (persons covered under Article 1 of the OECD Model Convention) are entitled to submit an APA application.

In general, APA applications must be filed prior to the realisation of the individual transaction. Based on current regulations, the APA, has to be requested, at the latest, by the end of the first business year which shall be covered by the APA.

A currently pending draft bill envisages the implementation of a separate provision in the General Tax Act dealing with APAs. According to the draft wording of the provision, the taxpayer could apply for an APA only if the facts and circumstances of the case in question have not been realised yet. Please refer to the German Trends & Developments chapter in this Guide for further potential legislative changes with regards to APAs.

Current Status

In contrast to the MAP, German tax authorities levy fees for APA procedures. The fees will be determined by the Federal Central Tax Office after the filing (ie, the pre-filing is free).

The standard fee for an APA is EUR20,000. If there is already an APA in place that the taxpayer wants to extend, fees will be reduced to EUR15,000. Amendments to prior APA filings are charged at EUR10,000. If, in total, transactions covered by the procedure do not exceed EUR6 million annual consideration for intercompany supplies (paid or received) and no more than EUR600,000 annual services consideration (paid or received), the fees mentioned above are cut in half.


Please refer to the German Trends & Developments chapter in this Guide for potential legislative changes with regards to APAs and user fees.

In practice, APAs are usually granted for a period of three to five years. Their term generally commences at the beginning of the fiscal year in which the formal request is filed. An earlier commencement may be allowed if, on the date when the APA request is filed with the Federal Central Tax Office, a tax return has not yet been submitted and the statutory deadline for submitting the tax return has not yet expired.

The Federal Central Tax Office may grant an APA with retroactive effect (roll-back) under certain circumstances, especially if the other country consents. According to the administrative regulations, a rollback requires proof from the taxpayer that the circumstances in the respective preceding years match the circumstances during the years covered by the APA. In practice, tax authorities usually combine the granting of a roll-back with a tax field audit. From a procedural standpoint, previous assessment periods cannot be covered by the APA. Therefore, to extend the terms of the APA to former years, an additional MAP has to be negotiated separately. The MAP negotiations will take place in parallel with the APA process.        

Germany requires taxpayers to provide transfer pricing documentation upon request. Non-compliance could result in several penalties.

Transfer Pricing Penalties

Transfer pricing documentation-related penalties depend on the documentation's quality and the timing of submission. Essentially, two alternative scenarios must be considered: (i) non-submission or submission of an "essentially unusable" file and (ii) late submission of an "essentially usable" file.

Non-submission or submission of an essentially unusable file

If the file is not submitted or is essentially unusable, German regulations establish the rebuttable presumption that the income of the German entity has been under-reported and allow German tax authorities to rely on estimated figures and adjust transfer prices at the upper end of the arm’s-length range. Furthermore, the tax authorities impose a penalty amounting to at least 5%, but not exceeding 10% of the income adjustment. The minimum penalty amounts to EUR5,000.

Late submission of an essentially usable file

If the file is essentially usable but submitted late, tax authorities may impose late fees or penalties of up to EUR1 million with a minimum penalty of EUR100 for each late day after the due date. Penalties may be waived if the taxpayer is not responsible (or has only limited responsibility) for the lack of appropriate documentation. Separate penalties may be imposed if the taxpayer fails to submit the CbCR at all or on time, or in the event the CbCR is deemed insufficient. Separate penalties may be imposed if the taxpayer submits a late or insufficient CbCR or if the taxpayer fails to submit any CbCR at all. These penalties may amount to up to EUR10,000.


Where adjustments result in an increased tax burden, non-deductible interest will be assessed at a rate of 6% per annum for the period commencing 15 months after the end of the calendar year in which the tax liability arose.

The interest rate of 6% per annum is currently under review by the German Constitutional Court.

Documentation Requirements

German transfer pricing rules require taxpayers to provide transfer pricing documentation (local file) on request. Furthermore, a master file must be submitted, unless the enterprise’s annual revenue has been less than EUR100 million in the preceding financial year.

Contemporaneous preparation

Contemporaneous preparation of transfer pricing documentation is not required but is recommended as the taxpayer has to document a number of facts regarding the price setting. There is no legal obligation to prepare annual documentation on ordinary, ongoing related-party transactions. Under general principles, documentation has to be updated or recreated when changes to conditions occur that significantly affect prices or margins.

An exception is that extraordinary business transactions have to be documented contemporaneously, that is, at the latest, six months after the end of the business year in which the transaction took place.

Extraordinary transactions

According to legislative regulations, extraordinary transactions are, in particular:

  • the conclusion and amendment of long-term contracts that have a significant impact on the income the taxpayer derives from its business relations;
  • the transfer of assets in the context of restructuring measures;
  • the transfer and use of assets in connection with significant functional and risk changes at the company;
  • business transactions in connection with changes in business strategy that are significant for transfer pricing; and
  • the conclusion of cost allocation agreements.

Submission periods

Transfer pricing documentation for ordinary business transactions must be submitted within 60 days of a request by the German Tax Authority, usually in the course of a tax audit. Extraordinary business transactions (see above) must be submitted within 30 days upon request by the German Tax Authority.


Specifics of transfer pricing documentation requirements are ruled by legislative regulation. The documentation regulations (Gewinnabgrenzungsaufzeichnungs-Verordnung, or GAufzV) were updated in 2017 to further reflect OECD recommendations. Domestic rules on the preparation of a local file (as opposed to the group master file) are generally in line with the OECD BEPS Action 13 recommendations. Additionally, the new law requires taxpayers to document the time of transfer price setting, and to provide detailed information on the database and search strategy used in determining an arm’s-length price or margin. Master-file requirements are also in line with the OECD BEPS Action 13 recommendations, and the revised provisions are applicable as of fiscal year 2017.

Documentation relief for small-sized companies

According to Section 6(2) of the GAufzV, enterprises with intercompany sales of goods of no more than EUR6 million (paid or received) per annum or intercompany provisions of services of no more than EUR600,000 per annum (paid or received) are exempt from the documentation requirements.

Documentation requirements of permanent establishments

The documentation requirements also cover head office–PE dealings and the allocation of assets between the head office and PEs. A German-based entity with a PE abroad and non-German entities with a PE in Germany have to prepare an "auxiliary and complementary statement". In principle, this is in addition to annual statutory and tax accounts.

Germany is largely compliant with the OECD's three-tiered approach to transfer pricing.

Local File and Master File Requirements

Regarding local file and master file requirements, see 8.1 Transfer Pricing Penalties and Defences.

Country-by-Country Reporting

Annual country-by-country reporting (CbCR) is required where certain criteria are met. In short, according to Section 138a of the AO, there are three scenarios in which German companies become obliged to file a CbCR in Germany:

  • the company is the ultimate holding company of the group preparing consolidated financial statements according to German or foreign GAAP;
  • a foreign parent company employs the German company for surrogate filing; or
  • the German company should be included in the foreign parent company’s CbCR filing, but the Federal Central Tax Office has not received CbCR data, in which case the German company is obliged to submit the CbCR for the group, or at least CbCR data to which it has access.

In its annual tax filing, the German company has to declare which of the above categories it belongs to. With regard to the procedure, it is important to note that preparing and submitting a CbCR is a reporting or notification obligation, but not a documentation obligation.

Germany's transfer pricing rules are already fairly aligned with the OECD Transfer Pricing Guidelines and more alignment can be expected taking into account ongoing efforts to implement legislative changes, such as the introduction of the DEMPE (development, enhancement, maintenance, protection and exploitation of intangibles) concept in German tax law.

Germany's transfer pricing rules do not generally depart from the arm's-length principle. However, based on the ECJ's ruling in the Hornbach case (C-382/16) in specific circumstances, economic reasons may justify transfer prices which, in principle, deviate from the arm's-length standard (see 14.2 Significant Court Rulings).

Written rules and government declarations do not indicate a departure from the arm's-length principle. In practice, however there is a trend for forcing profit splits on taxpayers against their will. Such profit splits, in turn, may be based on a so-called value contribution analysis. One can make a case that these value contribution-based profit splits are formulary profit apportionments based on labour cost.

From a legislative point of view, German transfer pricing rules are constantly evolving. German legislators generally tend to follow OECD recommendations; however, there are exceptions to the rule.

BEPS Compliance

Regarding the OECD's BEPS project, Germany had already put in place a number of BEPS-related legislative provisions beforehand (eg, thin-cap rules and controlled foreign company (CFC) rules were already established) and remains eager to transpose a lot of recommendations into its tax laws. As an EU member state, Germany is also required to implement the EU's ATAD Directives (I and II) into domestic law. Although Germany is currently behind on some aspects of ATAD implementation, there is no doubt that Germany will eventually do so.

OECD Proposals on Taxation of Digital Business Models

Regarding the OECD's agenda on taxation of digital business models, Germany has great sympathy for the so-called Global Anti-Base Erosion (GloBE or Pillar Two) proposal, which aims at introducing a global minimum taxation. This position may be incentivised by the fact that German CFC legislation is suspected to be in conflict with EU regulations. Yet, Germany is likely to also adopt the proposals made by the OECD under their so-called Pillar One approach, if international consent is found. However, concerns about German exports have been raised.


Germany has signed the Multilateral Instrument (MLI). 14 German double tax conventions (DTCs) are to be amended by the MLI, namely the DTCs with Austria, Croatia, the Czech Republic, France, Greece, Hungary, Italy, Japan, Luxembourg, Malta, Romania, Slovakia, Spain and Turkey. Full implementation will take place in two stages. The first step has been completed by adopting the MLI Implementation Act of 28 November 2020. In a second step, Germany intends to clarify amendments to DTCs based on the MLI via bilateral consultation and an DTC Application Act, which shall adopt changes in parliament. In addition to the implementation of the MLI, consultations have begun with other DTC states to amend the respective DTCs according to the ideas of the BEPS project.

A group entity may be guaranteed a return for its activities by another group entity for a transaction between these two entities, as long as this is in line with the arm's-length principle (ie, in particular, reflective of the functions, performed, risks assumed and assets used by that first-mentioned group entity). As a result, this group entity would effectively not bear the risk of its operations. Such a scenario may apply to limited risk entities with routine functions which are remunerated on a cost plus basis.

It is important to note that it is not sufficient to allocate risks purely on paper. Rather, the effective control of relevant risks and the DEMPE approach are decisive. If the transfer prices are not reflective of the entities' actual participation in opportunities and risks, transfer pricing adjustments must be expected.

In practice, controversies about risk allocation often crystalise around (i) outbound principal structures and (ii) inbound sales-support entities.

The UN Practical Manual on Transfer Pricing does not have any particular impact on transfer pricing practice or enforcement in Germany.

Taxpayers in Germany cannot rely on any transfer pricing safe harbours stipulated in German tax law. Arm's-length transfer prices have to be determined on a case-by-case basis, taking into account all the facts and circumstances of the respective case. In practice, there are certain rules of thumb that may be applied by taxpayers and tax auditors to cross-check transfer prices. Rules of thumb should only be applied after a careful analysis of the case at hand; only in exceptional cases will it be enough, for the purposes of German transfer pricing documentation standards, to simply refer to them.

Rules of thumb that may be applied by taxpayers and tax auditors are the guidelines set by the OECD and EU Joint Transfer Pricing Forum on low value-adding intra-group services.

In general, location savings must be taken into account as a comparability factor when determining transfer prices. As stated in 3.1 Transfer Pricing Methods, special valuation rules apply in connection with the transfer of a function (business restructuring). When determining the arm's-length transfer price as a transfer package, potential location savings of the receiving entity must be taken into account. According to the administrative regulations on the transfer of functions, the allocation of location savings between the transferring entity and the receiving entity depends on the individual negotiating power of the two parties in the deemed pricing negotiations and their other options realistically available. There are a number of case law decisions in Germany on the topic of location savings.

There are a number of transfer pricing rules in Germany which could be considered as unique, such as:

  • very detailed and aggressive rules on valuation of transfer packages (see 3.1 Transfer Pricing Methods);
  • the systematic priority of the prudent and diligent managing director (see 3.1 Transfer Pricing Methods);
  • the concept of the "hypothetical" arm's-length range (see 3.1 Transfer Pricing Methods); and
  • rules on corresponding taxation in connection with (constructive) dividends and contributions.

In general, the audit practice in Germany with respect to transfer pricing can be described as very detail-oriented.

Co-ordination between transfer pricing and customs valuation is not required per se but highly advisable since valuation differences exist between the two areas. Using transfer prices as customs values is possible if the transfer prices meet specific requirements, such as that the transfer price reflects the current value at the time of the import and that an individual assessment of each imported good is possible for customs purposes.

Generally, taxpayers in Germany can file administrative or court appeals. There are only two court instances. Whereas the local tax court (first instance) both investigates the facts and makes findings on the law, the Federal Tax Court strictly focuses on revisions of questions of law, be they substantive or procedural in nature (second instance). Where questions of European law are critical for a decision on the case, local tax courts may, and the Federal Tax Court is obliged to, refer the case to the European Court of Justice. Once legal court instances are exhausted, the taxpayer may raise a complaint with the Federal Constitutional Court for a violation of constitutional rights. The Court decides whether to admit the complaint.

Post-audit Appeal Process

Once post-audit tax assessment notices have been issued, they usually become "final" according to general rules if the taxpayer does not appeal them within one month after notification (see Sections 347 and 355 of the AO). The appeal can be filed with the tax office that originally issued the tax assessment notice or it can be filed in the form of a leapfrog appeal with the state tax court subject to the consent of the local tax office. If the appeal is not filed as a leapfrog appeal or the local tax office does not consent to such an appeal, the local tax office will decide on the appeal. If the unsettled issues have already been discussed with the representatives of the local tax office without settlement after the tax audit report was issued, it is generally unlikely that the tax office will decide in favour of the taxpayer.

If the decision of the tax office is unfavourable, usually, the taxpayer can file an appeal with the local tax court within one month of notification of the decision. The court will investigate the facts and circumstances of the case de novo and apply the law valid at that time. Local tax court procedures take one or two years before a hearing is finally scheduled and the decision of the court is issued. Courts are encouraged by a Federal Tax Court decision to expedite proceedings and, if possible, to set a date for an oral hearing and a final decision within two years after the claim is lodged.

The right to appeal against a decision of a state tax court is limited and is subject to a detailed set of rules. Where the case involves novel legal questions and is therefore of "general interest", it is more likely that the state tax court would grant leave to appeal or that an appeal would be accepted by the Federal Tax Court. Appeals to the Federal Tax Court have to be filed within one month after receipt of the decision of the state tax court. The Federal Tax Court relies upon the facts developed during state tax court proceedings and only reviews questions of law, whether substantive or procedural in nature.

(Temporary) Payment of Tax During Appeal Procedure

In general, even if the taxpayer files an appeal, the disputed tax has to be paid in due course. The taxpayer has the option to file a separate application for suspension of operation if, for example, there are serious doubts about the legality of the tax assessment notice in question. The taxpayer should take into account, though, that interest payments (0.5% per month, adding up to 6% per annum) will be charged on the suspended tax liability if the taxpayer does not succeed in the appeal proceedings.

The interest rate of 6% per annum is currently under review by the German Constitutional Court.

In Germany, transfer pricing cases used to be settled by compromise or negotiation in the course of an audit or in the post-audit appeals stage. Now, this has changed and there is steadily growing case law on transfer pricing in Germany, including on procedural questions. In view of the increasing aggressiveness of German tax authorities with regard to transfer pricing, taxpayers are often more willing to take their cases to court and/or into mediation leading to a noticeable increase in precedents in recent years.

The following German tax court rulings are some of the most important ones in the area of transfer pricing that have been issued since 2000.

There have been several decisions on the deductibility of intra-group royalty fees for a licence to use a branded corporate group name. In 2000, the Federal Tax Court (I R 12/99) ruled that royalty payments for the use of the corporate group name may be deductible for tax purposes if it is a protected trademark or brand name and if its usage provides valuable benefits to the licensee. However, later on, the Lower Tax Court of Munich (6 K 578/06) stipulated that deducting a royalty payment is subject to effective legal and practical benefits for the licensee. More recently, the Lower Tax Court of Münster (4 K 1053/11 E) decided that the arm’s-length principle requires a licence to be in place for the use of a corporate group name by a foreign group entity when the trademark has value in itself. However, in 2016, the Federal Tax Court (I R 22/14) reversed this controversial decision. In essence, the Federal Tax Court decided that a usage of name rights does not establish a business relationship within the meaning of Section 1(4) of the FTA, if these rights are granted to the subsidiary as part of a corporate relationship (eg, in consideration of shares). New administrative regulations on the use of group names, trademarks and logos were published on 7 April 2017. They apply in all pending cases and largely disregard the Federal Tax Court's decision. Therefore, it seems fair to assume that further tax court proceedings will be initiated.

In a landmark decision of the Federal Tax Court in 2001 (I R 103/00), the court clarified important procedural aspects of transfer pricing rules and regulations, in particular on the burden of proof, transfer pricing documentation, the taxpayer’s duty to co-operate with the tax authorities and the use of secret comparables. As a reaction to the ruling, the German legislature introduced important changes in German transfer pricing law which partly supersede the court’s decision.

A 2004 decision of the Federal Tax Court (I R 87/02) addresses the arm’s-length principle and states that the positions of both (theoretical) contracting parties, their profit expectations and alternative actions (similar to "other options realistically available" in 7 Chapter IX of the OECD Transfer Pricing Guidelines 2017) have to be taking into account when determining an arm's-length price.

In 2005, the Federal Tax Court (I R 22/04) confirmed it’s already established principles according to which losses incurred by a distribution entity over a certain period trigger a rebuttable presumption that the transfer prices are not at arm’s length.

In a 2011 decision, the Federal Tax Court (X B 37/11) confirmed the statutory authority of the tax administration to assess penalties between EUR2,500 and EUR250,000 if a taxpayer does not fulfil its co-operation duties during a tax audit in due time (eg, making records available).

In 2012, 2014 and 2015, the Federal Tax Court (I R 75/11, I R 23/13 and I R 29/14 respectively) prescribed the prevalence of double tax treaty rules over Section 1 of the FTA. In all three decisions, the Federal Tax Court decided that based on double tax treaty rules similar to Article 9 of the OECD Model Convention, an adjustment based on the arm’s-length principle is limited to a correction of the amount (price adjustment) but not possible with respect to the allegedly non-arm's-length nature of the general conditions of the underlying controlled transaction. On 30 March 2016, the Federal Ministry of Finance issued a "non-application decree" stating that Article 9 of the OECD Model Convention does not refer to a transfer price adjustment but to a profit adjustment instead.

In 2013, the Federal Tax Court (I R 45/11) ruled that the obligation to prepare, and submit upon request, transfer pricing documentation is in line with EU law. Even though the obligation restricts the freedom to provide services, such restriction is justified by overriding reasons relating to the public interest and is proportionate to its aim.

In 2016, the Lower Tax Court of Münster (13 K 4037/13 K F) confirmed that there is, in general, no hierarchy within the standard transfer pricing methods (CUP, resale minus, cost plus). In local tax court proceedings, it is up to the tax court to determine the most appropriate method for each individual case. In the case at hand, the court assessed that cost plus shall be the most appropriate method to determine arm’s-length interest rates on intra-group loans. This ruling is still subject to revision by the Federal Tax Court (pending case I R 4/17).

In 2016, the Lower Tax Court of Cologne (2 V 2498/16) confirmed its position that an EU member state’s request to another member state for administrative assistance is in line with the law if the requested information is foreseeably relevant to the administration and enforcement of the domestic laws of the requesting member state. According to the court, "foreseeably relevant" means that at the time of the request it was reasonably possible that the requested information could be of relevance for tax purposes. This interpretation of "foreseeably relevant" sets the bar fairly low and, therefore, nearly anything could be lawfully requested.

In 2017, the Lower Tax Court of Cologne (13 K 2302/14) confirmed that loans can be secured through guarantees between affiliated entities. The guarantee fee can be determined based on the CUP method. Furthermore, the tax court accepted bank loan interest rates as comparables for determining an arm's-length interest rate for intra-group loans.

On 31 May 2018, the ECJ ruling in Hornbach (C-382/16), considered the compatibility of Section 1 of the FTA with European law. Although Section 1 of the FTA restricts the freedom of establishment, it is justified and proportionate if the taxpayer is given the opportunity to present "economic reasons" justifying transfer prices which generally deviate from the arm’s-length principle. In this context, the Federal Ministry of Finance published new administrative regulations on the application of the ECJ's judgment. The regulations limit the scope of application (ie, the possibility to defend a generally non-arm's-length transaction based on economic reasons) to situations where the taxpayer or a related party is in need of restructuring due to impending insolvency. The possibility of a successful restructuring must also be proven. The regulations are effective as from 6 December 2018 and apply to all open cases.

In 2018, the Federal Tax Court (I R 77/16) ruled that a service contract between an entity and its shareholder – which does not specify whether, how and when the services are supposed to be performed – does not comply with the arm’s-length principle. Although the case at hand was domestic in nature, the principles should also be relevant for cross-border arrangements. It is noteworthy that the Federal Tax Court did not rely on its principles according to which a hidden profit distribution is triggered if an entity provides a service to a controlling shareholder without a clear, prior, legally effective and actually implemented agreement.

In 2018, the Federal Tax Court (XI B 123/17) ruled that tax audit inquiries, even if they only constitute "mere administrative actions" (Realakt), could be appealed in court if, in the first place, the tax authorities have formally dismissed the taxpayer's objection against such inquiries.

In 2019 and 2020, the Federal Tax Court (amongst others I R 73/16, I R 51/17 and I R 81/17) departed from its previous case law according to which Article 9 of the OECD Model Convention limited the scope of application of Section 1 of the FTA to price adjustments. The court now extends the scope of application to corrections on grounds of principle. Accordingly, Article 9 (1) of the OECD Model Convention (or the corresponding correction provision of the respective DTC) not only permits price adjustments, but also allows the neutralisation of the profit-reducing (partial) writing-off of a non-secured loan receivable. In addition, the court revised its case law on implicit support arising from group affiliation. Implicit group support shall merely describe the legal and economic framework of the corporate relationship and expresses the customary practice of not securing credit claims within a group as it is done among third parties. However, implicit group support itself could not be regarded as a loan security. Finally, the court lays down its interpretation of the ECJ decision “Hornbach” (C-382/16). Even if the taxpayer can prove economic reasons for the transaction at hand, a transfer price adjustment may still be required depending on the individual facts and circumstances. Constitutional complaints against several judgments (I R 73/16, I R 34/18, I R 72/17) are currently pending before the Federal Constitutional Court (2 BvR 1161/19, 2 BvR 1079/20, 2 BvR 2002/20).

On November 26, 2019, the Lower Tax Court of Munich (6 K 1918/16) issued a ruling dealing with several transfer pricing related matters. First, the ruling accepts the principles of intentional set-off. Second, the ruling clarifies that a value chain analysis for transfer pricing documentation purposes should only focus on the taxpayer's transactions with related parties and their respective value contributions which are relevant to the case at hand. Third, the tax court ruled that the transfer of a customer relationship from one group entity to another cannot be deemed to be a taxable transfer of functions, if the transferring entity can provide economic reasons for the customer's decision, such as a non-competitive cost position of the transferring entity.

In its decision of 27 November 2019 (I R 40/19), the German Federal Fiscal Court commented on the relationship between hidden profit distributions and Section 1 (1) of the FTA. According to the decision, there is no order of precedence. Insofar as the two laws would result in the same outcome, the legal practitioner may choose which of them to apply as a matter of priority. This confirmed the long-standing practice on tax audits. It is worth noting that the judgment relates to the disputed years 2003 and 2004. It remains to be seen to what extent FYs 2008 onwards will be affected since Section 1 of the FTA was subject to revisions in 2008.

The deductibility of outbound payments relating to uncontrolled transactions can be restricted under specific rules in German law – eg, non-deductibility of expenses for gifts of more than EUR35, non-deductibility of interest expenses due to interest-barrier rules (similar to the ones stipulated in BEPS Action Plan 4 and the ATAD) and non-deductibility of liabilities or payments if the creditor or recipient is not disclosed.

The deductibility of outbound payments relating to controlled transactions can be restricted under specific rules in German law – eg, by way of requalification in a non-deductible hidden profit distribution, non-deductibility of interest expenses due to interest-barrier rules (similar to the ones stipulated in BEPS Action Plan 4 and the ATAD) and non-deductibility of payments if the creditor or recipient is kept unknown. For royalty payments see licence barrier as described in 4.1 Notable Rules.

There are a number of German rules regarding the effects of other countries' legal provisions.

In general, Germany adheres to the principle of "Völkerrechtsfreundlichkeit", meaning that treaty law takes precedence over domestic German tax law (subject to treaty overrides in line with the principle of lex posterior derogat legi priori). On the other hand, the Constitutional Court has given the legislature large latitude for treaty overrides.

The principle of corresponding taxation – which prescribes, for example, that the tax treatment of a dividend distribution at the level of the receiving German entity depends on the tax treatment at the level of the distributing foreign entity – is also worth noting.

There is no publicly available information on APAs or transfer pricing audit outcomes in Germany to protect tax secrecy. With respect to the exchange of taxpayers' information amongst tax administrations/competent authorities, see 6.1 Sharing Taxpayer Information.

On the level of the Federal Central Tax Office, extensive statistical information on international tax matters and transfer prices are collected. This information is confidential and is only available to the tax authorities. In a 2001 decision, the Federal Tax Court ruled that the use of secret or anonymous data does not, per se, violate German tax procedures if the data is presented in a way that allows the taxpayer to assess and comment on the data. This restriction effectively eliminates the tax authorities' ability to rely on secret comparables in tax administrative and tax court proceedings. The German tax authorities have increasingly moved toward using publicly available databases to cross-check benchmark studies presented by the taxpayer or conduct their own analyses.

COVID-19 has affected the transfer pricing landscape, but not in a way which is unique to the German market. As in many other countries, COVID-19 has triggered a variety of transfer pricing questions which need to be analysed on a case-by-case basis. Examples of such questions include treatment of government support, impact on robustness of comparability analyses, allocation of COVID-19 losses or costs induced by COVID-19, allocation of taxing right as regards employment income of cross-border/frontier workers, risk of permanent establishments due to remote working, and the impact on existing and pending APA procedures.

The German government has put in place several tax relief measures in response to the COVID-19 situation, which include:

  • the possibility to apply for a deferral of certain taxes which are due by 31 March 2021 up until 30 June 2021, with the possibility of a prolongation up until 31 December 2021 subject to instalment payments;
  • the possibility to apply for a reduction of prepayments concerning income tax, corporate income tax and trade tax if it can be predicted that profits will be lower than expected due to COVID-19;
  • the extension of the tax return submission deadline for 2019 by six months if a tax advisor is in charge of filing the return (deadline extended from 28 February 2021 to 31 August 2021);
  • the possibility for the employer to pay out a tax-free bonus or benefit in kind of up to EUR1,500 per employee during the period 1 March 2020 to 30 June 2021;
  • a reduction of the general VAT rate from 19% to 16% and of the reduced VAT rate from 7% to 5% for the period 1 July 2020 to 31 December 2020; and
  • an increase in loss carry-back from EUR1 million to EUR5 million temporarily applicable in the assessment periods 2020 and 2021 (note: loss carry-back only effects the taxable income of the preceding assessment period (ie, 2019 and 2020 respectively)).

Tax audits in Germany have generally progressed despite the COVID-19 restrictions with respect to, for example, physical meetings. Taxpayers and tax offices understood the organisational difficulties imposed by COVID-19 and, thus, it was generally accepted that certain processes may take more time (eg, submission of requested documents). The way taxpayers have been able to communicate with tax auditors (eg, video conferences or just standard phone calls) has varied since, inter alia, the IT equipment of tax offices differs depending on the relevant federal state (Bundesland). From a tax technical perspective, COVID-19 has not yet had an impact on tax audits since the years which are currently under review relate to pre-COVID-19 periods.

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