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German Transferprices

Overview and updates of German transfer pricing regulations

On 06 June 2023 the German Ministry of Finance issued updated administrative principles on transfer pricing, clarifying and specifying German transfer pricing regulations as per the German Foreign Tax Act.

Because transfer prices are increasingly a major issue in German tax audits not only of large multinational groups but also of small and medium-sized businesses, this article provides a general overview of Germany’s transfer pricing regulations as well as the updated principles recently issued.

Every organization doing business in Germany through a corporation or a permanent establishment is strongly encouraged to analyze potential transfer pricing risks and be prepared for a respective tax audit.

Parties and transactions subject to German transfer pricing regulations

According to the German Foreign Tax Act, transfer pricing regulations apply to business transactions between associated enterprises.

Enterprises are deemed associated if one has a direct or indirect interest in the other 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, two enterprises are also considered associated if one is able to exercise (directly or indirectly) a controlling influence on the other (or a third person on both), or if one is able to exercise an influence over the other in agreeing to the terms of a business relationship that is based outside that business relationship, or if one of them has an owning interest in the other resulting in income.

Permanent establishments are also considered enterprises according to the principles above, and are therefore also subject to transfer pricing regulations in Germany.

Transfer pricing regulations and transfer pricing methods in Germany

In Germany’s tax legislation, the arm’s length principle is defined in section 1 of the Foreign Tax Act. Additional references in the Corporate Income Tax Act and the Income Tax Act, as well as multiple ordinances regarding these legal provisions, are provided by the German Ministry of Finance.

Further, the administrative principles issued by the German Ministry of Finance explicitly refer to the OECD transfer pricing guidelines.

As per the German Foreign Tax Act and German transfer pricing administrative principles, as well as the OECD transfer pricing guidelines, the following transfer pricing methods are explicitly accepted:

Standard methods

- Comparable uncontrolled price method

- Resale price method

- Cost plus method


Additional methods

- Transactional net margin method

- Profit split method

Transfer pricing documentation requirements in Germany

In general, there is no legal requirement in Germany to prepare an annually updated documentation of arm’s length prices of transactions between related parties (= transfer pricing documentation).

Transfer pricing documentation typically only has to be provided to the German tax authorities upon request (usually during a tax audit). In this regard, the taxpayer has a legal obligation of cooperation. Once requested, the deadline for providing transfer pricing documentation is 60 days, with only 30 days for exceptional business transactions.

An exception to the general transfer pricing documentation requirements exists if:

  • The sum of the remuneration for the delivery of goods or products resulting from transactions between related parties during the financial year is less than EUR 6 million; and if
  • The sum of the remuneration for other transactions between related parties during the financial year is less than EUR 600,000.

An exception to the so-called Master File (“overview of the type of business activities conducted by the enterprise group and of the transfer pricing method used by the group”) exists if the enterprise’s revenue in the previous financial year totaled less than EUR 100 million.

Since the deadline to prepare a transfer pricing documentation report in the case of a tax audit is only 60 days, organizations are advised to annually prepare and maintain transfer pricing documentation if the general exception mentioned above does not apply in order to be able to meet the tax audit deadline.

Consequences if a transfer pricing report is not prepared, or transfer prices are not in accordance with the arm’s length principle

If enterprises do not comply with the legal obligation of cooperation regarding the preparation of a transfer pricing report (e.g. if a transfer pricing report is not provided, if it is provided late, or if it is deemed unusable), German tax authorities may (deniable):

  • Estimate higher taxable profits;
  • Exploit existing ranges of transfer prices to the taxpayer’s detriment; or
  • Impose penalties.

Transfer prices which are not in accordance with the arm’s length principle may be corrected, and taxable profits assessed in a way that arm’s length parties agree upon. Further, potentially additional correcting regulations like hidden contributions or hidden profit distribution may be applied.

Cross-border relocation of functions

Germany has specific regulations regarding the relocation of functions between related entities within a multinational enterprise. This relocation of functions typically involves the shift of valuable business functions, assets, and risks from Germany to another jurisdiction between associated entities (including permanent establishments).

If functions are relocated in the above manner, Germany levies a tax on the so called “transfer package” since future taxable profits potentially generated through the relocated functions and assets are being moved to another tax jurisdiction.

German Ministry of Finance updated administrative principles

Amongst others, Germany’s recently issued updated administrative principles on transfer pricing include the following key changes:

  1. Cross-border relocation of functions
    Until now, the separately issued administrative principles regarding the cross-border relocation of functions have been included in the administrative principles on transfer pricing.
    The Ministry of Finance comments and specifies, among other things, on the determination and relocation of a function, the transfer package, as well as the determination of the value of the transfer package.
    To help, a number of examples concerning the determination of value during the relocation of a function have been added to the guidelines.
    Additionally, the German Ministry of Finance continues to follow a restrictive view on some aspects not regulated by law. Specifically, the new guidelines do not include a de minimis rule and certain other aspects that were previously helpful in practice. This further tightens the application of transfer of function rules for taxpayers.
    As a result, the new guidelines regarding the cross-border relocation of functions (approximately 10 pages in length), are significantly shorter than the previously issued stand-alone guidelines which totaled more than 70 pages.
  1. Intercompany financing transactions
    With respect to intercompany financing transactions, the German Ministry of Finance aligns its interpretation on the examination of income allocation between entities involved in these transactions with OECD transfer pricing guidelines as well as with recent German jurisprudence of the federal fiscal court on determining intercompany interest rates for intercompany loans.
    In addition to previous acceptance of considering support from the corporate group when assessing the subjective default probability of the borrower, the Germany Ministry of Finance updated guidelines explicitly address the “advantage of knowledge” due to influence based on corporate law and control possibilities that can have an impact on interest rates. When evaluating the lack of security for group loans, the following should be taken into account: (i) whether a risk premium is possibly charged; (ii) which alternative actions are available to related parties; and (iii) whether these would have led to more favorable terms for the debtor.
    The German Ministry of Finance no longer generally expects the cost-plus method to be used for intra-group loans from financing companies, but refers now to the same within the framework of the “best method” approach. However, if the cost-plus method is deemed the most appropriate method, remuneration should be based on proven and directly attributable operating costs.

We highly encourage any business active in Germany to conduct a thorough review of their transfer prices and underlying strategy.

Also, the specific documentation requirements should be reviewed, and even though no annual documentation report is required, we highly recommend preparing at least a simple report in order to be prepared for a potential tax audit. While the period of 60 days to prepare a report sounds adequate, real-life experience shows that this is very often not sufficient.




Dr. Benjamin Cortez

Dr. Benjamin Cortez

MBA (International Taxation), APCIT (IBFD)
Master of Laws in Corporate Restructuring

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