Germany is one of the founding states of the OECD that signed the OECD convention in 1960. Currently, Germany’s transfer pricing (TP) framework is aligned in compliance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Its domestic transfer pricing rules are provisioned in two main legal acts: The Corporation Tax Act, and the Foreign Tax Act, also known as the External Tax Relations Act.
In addition, the framework of TP is supplemented by Ordinances and Circulars as issued by the Ministry of Finance.
Arm’s Length Principle
Germany follows the definition of the arm’s length principle stipulated in Article 9 of the OECD Model Tax Convention, and under the current legislation, the arm’s length principle is primarily defined under Section 1 of the Foreign Tax Act, which requires that cross-border transactions between relat3ed parties should have market-based terms as if concluded by independent parties. In addition, section 90(3) of the German Fiscal Code demands documentation to verify compliance with the principle. These national regulations comply with the OECD Transfer Pricing Guidelines, which Germany adopts for purposes of uniformity and conformity to international norms.
Related Party Definition
In Germany, Section 1(2) of the External Tax Relations Act defines related parties for transfer pricing purposes. According to this article, a party is considered related to the taxpayer if:
- The party holds a direct or indirect stake of at least 25% in the taxpayer’s capital or can exercise a controlling influence over the taxpayer. On the other hand, the taxpayer may hold such a stake or control over the party.
- A third party possesses a substantial stake or can exercise controlling influence over both the taxpayer and the other party.
- The terms of the business relationship are influenced by factors beyond the business relationship itself, or one party has a vested interest in the income generation of the other.
These provisions ensure that transactions among parties with significant ownership relationships or control are undertaken at arm’s length, terms that independent parties would accept under comparable circumstances.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price are in alignment with the OECD-approved methods and include:
- Comparable uncontrolled price method
- Resale price method
- Cost plus method
- Transactional net margin method
- Profit split method
Germany’s transfer pricing framework does not differentiate between the methods. Instead, it supports the application of the most appropriate method, by assessing the strengths and weaknesses of each method. In addition, German legislation allows for the usage of another method called the “profit forecast approach”.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. In Germany, comparing related-party transactions to those between independent businesses is a key part of ensuring fair pricing in transfer pricing. Compliance with the 2023 Administrative Guidelines on Transfer Pricing, which integrate OECD standards, requires companies to consider factors such as contractual terms, functional and risk analysis, economic conditions, business strategies, and market circumstances.
In selecting comparables, the German tax authorities have no preference in principle for third-party over internal comparables, or vice versa; it is a facts-and-circumstances determination in each case.
The Foreign Tax Act and OECD Transfer Pricing Guidelines, which Germany follows, emphasize the importance of utilizing the most appropriate comparables. Local comparables are generally preferred because of market relevance, but there is no obligation to prefer them over foreign comparables. The governing criterion is the ability to ensure a sufficient degree of similarity with the controlled transaction. The German tax authority regularly makes use of benchmarking databases like Bureau van Dijk to conduct comparability analysis to ensure that transactions between related parties are arm’s length priced.
Documentation Requirements
Transfer pricing documentation requirements in Germany are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the German tax authority.
- Master File;
- Local File, and
- Country-by-Country (CbC) report.
Master File and Local File
The Master and Local File transfer pricing documentation requirements align with OECD BEPS Action 13 and apply to companies with cross-border related-party transactions. These companies with specified thresholds must maintain and file this documentation upon request by tax authorities, to satisfy the arm’s length principle.
The Master File is required for entities with an annual turnover exceeding €100 million. It provides a global overview of the multinational enterprise (MNE), detailing its organizational structure, business operations, intangibles, intercompany financial activities, and overall financial position. This document must be submitted within 30 days of a tax audit notification, ensuring authorities have a clear understanding of the MNE’s transfer pricing policies.
The Local File aims at the German party’s direct intercompany transactions and applies to companies with more than €6 million in goods transactions or €600,000 in services transactions a year. It must include in-depth documentation of shareholding arrangements, relationships, functional and risk analysis, transfer pricing methods, and supportive comparability data. Under the new law as of January 1, 2025, the Local File must be submitted within 30 days if called for by tax authorities, compared to 60 days under the old regime.
Country-by-Country (CbC) Reporting
Germany introduced Country-by-Country (CbC) reporting in 2016, aligning with OECD BEPS Action 13 to ensure tax transparency and risk assessment. The companies that are required to submit a CbC report include MNE groups with consolidated revenues of at least €750 million in the previous fiscal year. Reports are submitted electronically to the Federal Central Tax Office before the end of the following fiscal year.
The responsibility to file the report falls on the German parent entities, and also local subsidiaries in the event the foreign parent entity fails to make a report. Foreign parent entities may also use a German entity as a surrogate parent to satisfy the reporting requirement. In the case a report has not been received from the part of the parent company, each German subsidiary or permanent establishment shall file a CbC report.
CbC report has three essential components: a cross-jurisdictional summary of the business activities of the group, ten financial items (including revenues, pre-tax profit, paid income taxes, shareholders’ equity, and number of employees) by country, and explanatory notes for interpretation.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Germany uses both APA and MAP to manage and resolve international tax disputes, in compliance with OECD guidelines. APAs are agreements made between the taxpayer and the tax authorities, in advance, to avoid tax disputes regarding transfer pricing methodology.
Since 2021, the German APA program only allows for bilateral and multilateral APAs, requiring cooperation with foreign tax authorities under existing double tax treaties. Unlike some jurisdictions, Germany does not offer unilateral APAs, ensuring that agreements prevent double taxation by securing mutual acceptance between the relevant tax administrations. APA procedures are governed by the Federal Central Tax Office.
The APA process is composed of formalized stages, including a pre-filing conference, filing of a formal application, negotiation between tax authorities, and completion of a binding tax ruling. An APA lasts up to 5 (five) years with the option for renewal or roll-back to earlier years upon specific requirements. Fees are also charged by Germany on processing APAs, routine applications being €30,000 and renewals €15,000. The process is intended to provide certainty and predictability to taxpayers on transfer pricing but involves significant documentation and coordination with foreign and German tax authorities.
Germany’s MAP process allows taxpayers to resolve cases of double taxation under Germany’s treaty tax agreements and the EU Arbitration Convention. MAP requests are handled by the Federal Central Tax Office, primarily adjustments for transfer pricing and allocation of profits issues. While MAP does not defer collection of tax, relief is granted upon settlement. If an agreement is not reached, a few treaties allow binding arbitration. Germany uses OECD standards to complete cases within 24 months.
Approach to Transfer Pricing Audits
Germany’s transfer pricing audit procedure relies on tax auditors’ judgment and experience because there is no formal audit guidebook that guides controlled transaction investigations. Auditors typically start by requesting full or partial transfer pricing documentation, beginning with high-risk areas such as diminishing German profits, substantial foreign subsidiary profits, low-tax country transactions, and function transfers.
Particular focus is given to services, licensing, financing, and function transfers, assessing economic substance, pricing strategies, and compliance with formal requirements like contracts and documentation. Auditors also examine withholding tax on royalties, deductibility of expenses, and permanent establishment risk. Taxpayers are asked to notify foreign affiliates of intended adjustments to facilitate competent authority procedures, ensuring consistent income apportionment and avoiding double taxation controversy.
Penalties
If a taxpayer fails to provide transfer pricing documentation or submits unusable documentation, tax authorities presume underreported taxable income, and penalties range from 5% to 10% of the income adjustment, with a minimum fine of €5,000. Additionally, if documentation is submitted late, penalties start at €100 per day, up to €1 million. For missing or incomplete Master Files, coercive fines of up to €25,000 may apply. Failure to comply with record-keeping obligations can lead to fines of up to €250,000. While authorities may waive penalties for minor offenses, stricter enforcement applies for significant violations, and penalties can be imposed per assessment period.
Taxation at a Glance
Germany’s income tax system follows a unified tax base, covering all types of income. Corporations pay corporate income tax and trade tax, while individual entrepreneurs and partnerships are subject to income tax and trade tax on their business activities. The official currency is Euro and Germany’s tax authority is called Federal Central Tax Office.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 15.825%. |
VAT | 19% |
Withholding tax on dividends to non-residents | 25% |
Withholding tax on interest to non-residents | 0/25% |
Withholding tax on royalties to non-residents | 15% |
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