Tuesday, 20 July 2021

Newsflash: Germany’s recent updates to its transfer pricing regulations

On 8 June 2021, the German tax authorities have published developments relating to transfer pricing regulations in the federal gazette (which are part of the so-called “Act to Modernise the Relief from Withholding Tax and the Certification of Capital Gains Tax”). One of the key points of the legislation includes amendments to the provisions on the arm's length principle under the Foreign Tax Act. With these updates, the German regulations become more aligned with the OECD Transfer Pricing Guidelines regarding specific topics. Furthermore, the updates may have an impact on existing transfer pricing documentation and the scope of intangibles. The updates relating to the arm's length principle will be applicable to income and corporation tax for tax assessment period 2022. More updates are expected at a later stage. Furthermore, we include some observations relating to transfer pricing audits in Germany.

An overview of the most interesting updates relating to transfer pricing regulations included in the German legislation are listed in the following paragraphs.

Transfer pricing methods and price comparisons 

The existing rules on the selection of a transfer pricing method, which is now based on the hierarchy of methods, is deleted and the most appropriate transfer pricing method is to be applied. With this update, the German legislation is closer aligned with the OECD Transfer Pricing Guidelines.

Furthermore, price setting approaches should be based on the circumstances at the moment when the intercompany transaction occurs (tendency towards ex ante price setting rather than ex post outcome testing). However, the taxpayer can also rely on later available data in certain cases. The German tax authorities can corroborate transfer prices based on data available at a later point in time, which could lead to an adjustment by the tax authorities based on an ex post analysis.

With reference to the calculation of the arm’s length range, the interquartile range is put forward. In cases where results fall outside the interquartile range, the median is indicated as the relevant adjustment point, whereas taxpayers have the possibility to demonstrate that another point would be more appropriate. 

Relocation of functions 

An amendment is made in the regulations regarding relocation of functions. Only one of the escape clauses from these specific regulations will remain. The relocation of functions is not applicable in cases where no significant intangible assets are transferred, and the receiving entity performs the transferred function only on behalf of the transferring entity based on the cost plus method.   


The new regulations include, for the first time, a legal definition of intangibles, which is closely aligned to the definition included in the OECD Transfer Pricing Guidelines. The DEMPE (development, enhancement, maintenance, protection and exploitation) concept is formally implemented, now being more in alignment with the OECD Transfer Pricing Guidelines. 

Price-adjustment clause 

The scope of (already existing) price adjustment clauses will be extended to situation involving substantial intangibles/advantages (not only relocation of functions). Also, the period in which price adjustments can be made is reduced from ten to seven years. In addition, certain situations are included in which a price-adjustment should not be made.

Advance pricing agreements (APA’s) 

The German tax authorities provide explicit regulations regarding the legal/procedural requirements for an APA. The time period for which an APA remains valid is generally five years, but it can be extended afterwards. The cost for an APA application has increased from EUR 20.000 to EUR 30.000 per application. The cost for an APA extension remains at EUR 15.000.

Next to the new legislation, it is worth to note that the German Tax audit environment has also been evolving over the years. Transfer pricing audits have significantly increased in Germany. It is worth mentioning that a huge amount of information is requested during German tax audits, not only transfer pricing documentation, internal transfer pricing guidelines and intercompany agreements but also information like internal communications (such as emails and internal messenger services) and they generally can get access to IT tools (e.g. ERP systems of the taxpayer).

It is the responsibility of the taxpayer to co-operate with the tax authorities and provide all necessary information. German tax authorities also take some far-going assumptions, such as where the German taxpayer is the shareholder of a related party, it is assumed to have access to all necessary information relevant for the transfer pricing audit and it cannot claim that it does not have access to relevant documents .

If you need further information regarding this topic, don't hesitate to contact the author:

Stefanie Van heugten (stefanie.vanheugten@tiberghien.com)