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13.4.1. Main Rules

The transfer pricing rules of Germany are described over several provisions in different legislative acts. One of the most relevant transfer pricing rules is the requirement for inter-company transactions to follow the arm’s length principle which is mandated by Sec. 1 of the External Tax Relations Act. Detailed transfer pricing regulations concerning the cross–border transfer of functions was incorporated into Sec.1 of the External Tax Relations Act on 1 January 2008.

In October 2010, new Administrative Principles were released clarifying the application of Sec. 1(3) of the External Tax Relations Act and the Executive Order on Transfer of Business Functions. Some relevant provisions for transfer pricing issues in German tax law are:

  • Section 8 (3) German Corporate Income Tax Act (hidden profit distribution);
  • Section 4 (1) German Income Tax Act and Directive R40 of the German Corporate Tax Directives (hidden capital injection); and
  • Sections 90(3), 162(3), and 162(4) German General Tax Code and the Executive Order to Sec. 90(3) German General Tax Code.

In July 2021, Germany published a letter containing new Administrative Principles for transfer pricing which clarify:

  • The applicability of the arm’s length principle; and
  • The significance of the 2017 OECD Transfer Pricing Guidelines for the examination of cross-border business relationships (OECD Transfer Pricing Guidelines have been attached as an annex to the administrative principles).

The letter also contains guidelines in relation to applying the arm's length principle, transfer pricing methods, comparability analysis, administrative approaches, intangible assets, etc.

The Administrative Principles issued by the tax authorities do not constitute binding law for taxpayers or the courts but are binding for the tax authority and, thus, indicate how the tax authority will treat specific intercompany transactions.

In addition to the above, administrative circulars concerning income allocation with regard to cross–border secondment of personnel, costs contribution arrangements, permanent establishments, and procedural guidance have been issued since 1999.

The transfer pricing rules are in line with the OECD Transfer Pricing Guidelines (“OECD Guidelines”). In addition, however, German law stipulates that for the interpretation of the arm’s length principle, the parties to an intercompany transaction are deemed to be fully knowledgeable about all facts and circumstances surrounding the transaction (information transparency). Moreover, German case law tends to equate the arm’s length principle with the principle of “prudent and diligent business management”. In tax audit practice as well as in tax court procedures, the OECD Guidelines are often applied and used as a point of reference.

Definition of Related Parties

Parties are considered related if:

  • One person either holds a direct or indirect interest of 25% or more in another person or has a direct or collateral possibility to exert a dominant influence over the other person; or
  • A third party holds an interest of 25% or more in both persons or exerts directly or collaterally a dominant influence.

Applicable Transfer Pricing Methods

The transfer pricing methods accepted by the German tax authorities include the five standard OECD methods:

  • Comparable uncontrolled price (CUP) method;
  • Resale price method;
  • Cost-plus method;
  • Transactional net margin method (TNMM); and
  • Profit split method.

Effective 9 June 2021, the best method rule applies for the determination of the arm’s length price. If comparable third-party data is not available, a hypothetical arm’s-length method should be applied utilizing generally accepted valuation techniques.

Previously, the selection of the transfer pricing method was dependent on the availability and quality of third-party comparable data under different situations like:

  • Full comparability of the data;
  • Limited comparability of the data; or
  • Non-availability of the third-party comparable data.

Use and Availability of Comparables

The inclusion of local comparables is not formally required under the law. Nevertheless, the tax authorities have a marked preference for the inclusion of local comparables in benchmarking studies and may challenge the comparability feature of benchmarking studies lacking local comparables.

There are no legal requirements mandating the use of a particular database. The use of the AMADEUS database for pan-European comparables is quite common. Note that the tax authorities require that information retrieved from a particular database must be verifiable through other internet resources. The tax authorities themselves have traditionally resorted to the use of secret comparables. They are now, however, reported to be using the AMADEUS database.

The use of the interquartile range is allowed for the determination of the arm’s length price and if actual transfer prices are set outside said range, the median is considered as arm’s length price and adjustments are made accordingly. Effective 9 June 2021, the taxpayer has an option to demonstrate that any other value within the overall price range (the range between minimum and maximum price of the involved parties) is more appropriate for the reflection of the arm’s-length principle.