Worldwide transfer pricing reference guide 2014

Germany
Taxing authority and tax law
Taxing authority: German taxes are administered either by the German Federal Central Tax Office (Bundeszentralamt für Steuern) or by
German state authorities.
Tax law: German tax law is found in tax acts, executive order laws, double taxation treaties and supra-national norms.
Relevant regulations and rulings
The taxing authorities assess intercompany transactions by following the arm’s length principle (§1 Foreign Tax Act). The German
interpretation of the arm’s length principle generally follows the definition in Article 9 of the OECD Model Tax Convention.
However, a relevant intensification, §1 Sentence 2 Foreign Tax Act stipulates that for the interpretation of the arm’s length principle,
it is assumed that both parties involved in an intercompany transaction have full knowledge about all facts and circumstances
(information transparency).
Detailed transfer pricing regulations concerning the cross-border transfer of functions were incorporated into §1 Foreign Tax Act on 1
January 2008. An Executive Order Law providing details on how the new transfer pricing provisions relate to business restructurings
and function transfers is effective from 2008 onwards.
In October 2010, new Administration Principles were released that include 81 pages of clarifications concerning the application of §1(3)
of the Foreign Tax Act and the Executive Order Law on Transfer of Business Functions. The Administration Principles detail, for example,
circumstances under which a business restructuring and function transfer would be exempt from the taxable valuation of the so called
“transfer package.” In such cases, the receiving entity of a function exclusively performs the transferred function for the transferring
entity and receives a cost-based remuneration (i.e., based on the cost plus method or a cost-based TNMM), in accordance with the
arm’s length principle. In such cases, it is assumed that the transfer package did not include any significant intangible property or other
advantages and, thus, a valuation of the transfer package is not required. This exemption from examination of the transfer package
generally affects the transfer of routine functions whose execution is connected with low risks and that, as a consequence, are usually
remunerated on the basis of the cost plus method.
As of 1 January 2013, a law amending §1 of the Foreign Tax Act has come into effect, which incorporates the authorized OECD approach
(AOA) on the allocation of profits to permanent establishments into German law. The AOA treats a permanent establishment as a
(nearly) fully separate entity for tax purposes. This includes the recognition of internal dealings between the head office and a foreign
permanent establishment such as the supply of goods, a service provision and even licensing arrangements. These dealings have to
be priced in accordance with the arm’s length principle, i.e., including a profit element. Due to the lack of legally binding contracts
between the different parts of one enterprise, contemporaneous transfer pricing documentation becomes crucial in order to defend the
transfer prices applied for internal transactions. The new domestic rules stipulate that Germany will not tax the profits of the permanent
establishment that are determined based on the AOA, if the AOA is not yet implemented in the applicable double tax treaty. However,
for the treaty relief the taxpayer has to “prove” that the other Contracting State does not apply the AOA and that this will lead to double
taxation.
Other relevant provisions for transfer pricing issues in German tax law are:
• § 8 (3) German Corporate Income Tax Act (hidden profit distribution)
• § 4 (1) German Income Tax Act with Directive R40 of the German Corporate Tax Directives (hidden capital injection)
• § 90 (3), 162 (3) and 162 (4) German General Tax Code and the Executive Order Law to § 90 (3) German General Tax Code
To help interpret the above outlined provisions, the German tax authority issued a circular on the Principles Governing the Examination
of Income Allocation between Multinational Enterprises in 1983, known as the Administration Principles. The Administration Principles
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 between related parties. The purpose of the Administration Principles is to provide a
directive concerning the tax audit treatment of transfer pricing cases, and to ensure the uniform application of rules and methods.
In addition to the two Administration Principles mentioned above, administration circulars concerning income allocation with regard to
cross-border secondment of personnel, costs contribution arrangements and procedural guidance have been published since 1999.
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