In German tax law, there is not one integrated section of statutory rules on transfer pricing, but several provisions in different legislative acts. The rules on constructive dividends and Section 1 of the Foreign Tax Act (FTA) are most influential for the tax treatment of transfer pricing. The concept of constructive dividends and Section 1 are interpreted by case law and are supplemented by various legislative directives and administrative circulars.

German transfer pricing rules and principles cover all sorts of business transactions concluded between German taxpayers and related parties abroad. In a nutshell, all related-party transactions not based on the statutes of association between (direct and indirect) shareholder (or partner) and company (or partnership) are subject to the arm's-length standard. This is regardless of whether the transactions are 'income' or 'capital' transactions. In addition, all transactions between a head office and its permanent establishment (PE) are covered, whether they are explicitly declared dealings or not. The term 'dealing' refers to fictitious cross-border transactions between a head office and its PE. Examples are inter-company sales (also investments) and services, loans or guarantees and IP licensing arrangements, as well as the transfer of functions between related parties.

The definition of a 'related party' goes beyond mere group companies, family members and relatives. Based on statute, a related party can be any party that is in a position to exert influence on a taxpayer or that has a special interest in the income generated by the taxpayer going beyond a regular business interest.

In practice, however, German tax authorities focus on transactions between group companies with direct or indirect shareholdings of at least 25 per cent (Section 1(2) FTA), as well as on transactions between members of a family.

In German transfer pricing law, there is a double theme of the arm's-length principle and the concept of the prudent and diligent managing director of an independent enterprise. In general, the classic arm's-length principle must be applied to cases where empirical data to determine arm's-length prices is available (the 'fact-based' or 'factual' arm's-length test). The concept of the prudent and diligent managing director is used, in particular, to obtain an arm's-length transfer price for inter-company transactions where empirical data with appropriate costs cannot be found (the 'hypothetical' arm's-length test).

Germany has started to implement OECD BEPS Action Reports, such as Action Report 13 on documentation. As long as OECD guidance or papers are not passed into law, neither the German tax administration nor the German tax courts are legally bound by them. This also applies to the OECD Commentary on the Model Convention and to the OECD Transfer Pricing Guidelines. Nevertheless, OECD guidance constitutes a relevant source of interpretation that can be used to determine arm's-length prices. In 2013, in response to the Authorised OECD Approach (AOA) to the allocation of profits between a head office and its PE, the German legislature adopted the AOA into German law with certain deviations. Even though specific AOA language on head office–PE profit allocation has only been included in a few German double tax treaties, the administration holds that the AOA takes precedence in the majority of cases, in particular when the contracting state is an OECD member. In addition, the German AOA rules generally prevail over profit allocation rules in the applicable double tax treaty.


In 2003, the German legislature introduced a statutory obligation to document transfer prices and their arm's-length nature.2 The statute provides that taxpayers are required to prepare documentation on cross-border transactions with related parties.

In line with OECD BEPS Action Item 13, the German legislature expanded the transfer pricing documentation requirements. The taxpayer must not only prepare a local file, but also a master file, unless the enterprise's annual revenue is less than €100 million. Transfer pricing documentation for ordinary business transactions must be submitted within 60 days upon request by the German Tax Authority, usually in the course of a tax audit. Contemporaneous preparation is not required but is recommended as the taxpayer has to document a number of facts regarding the price setting. There is no legal obligation to prepare annual documentation on ordinary, ongoing related-party transactions. Under general principles, documentation has to be updated or recreated when changes to conditions occur that significantly affect prices or margins.

An exception is that extraordinary business transactions have to be documented contemporaneously, that is, at the latest, six months after the end of the business year in which the transaction took place, and documentation has to be submitted within 30 days upon request. According to legislative regulations, extraordinary transactions are, in particular, transfers of functions, the conclusion and amendment of significant long-term inter-company agreements and the conclusion of cost allocation agreements.

The documentation regulations (GAufzV) were updated in 2017 to further reflect OECD recommendations. The new rules also put more emphasis on value chain analyses and economic substance requirements. Domestic rules on the preparation of a local file (opposed to the group master file) are generally in line with the OECD Action 13 recommendations. Additionally, the new law requires taxpayers to document the time of transfer price setting as well as detailed information on the database and search strategy used in determining an arm's-length price or margin. Master file requirements are also in line with the OECD Action 13 recommendations, and the revised GAufzV is applicable as of fiscal year 2017. It is expected that the Administrative Principles – Procedure (Verwaltungsgrundsätze-Verfahren) will also be amended accordingly.

According to Section 6(2) GAufzV, enterprises with inter-company provisions of goods of no more than €6 million (paid or received) per annum or inter-company provisions of services of no more than €600,000 per annum (paid or received) are exempt from the documentation requirement.

The documentation requirement also covers head office–PE dealings and the allocation of assets between head office and PE.

A German-based entity with a PE abroad and non-German entities with a PE in Germany are to prepare an 'auxiliary and complementary statement'. In principle, this is in addition to annual statutory and tax accounts.

The auxiliary and complementary statement has to be set up at the latest before the deadline for submission of the annual tax return. It is, however, not part of the tax return; it only needs to be submitted upon request. The auxiliary and complementary statement includes (tangible and intangible) allocated assets, allocated free capital, allocated liabilities, associated payables and receivables, and constructive income from internal dealings as well as opportunities and risks transferred from the head office to the PE. In line with OECD guidance, the auxiliary and complementary statement has to record intangible values that are not assets in the tax accounting sense of the term.

In addition, annual country-by-country reporting (CbCR) is required where certain criteria are met. German group parent companies recording consolidated sales revenues of at least €750 million have to prepare annual CbCRs on the group's sales revenues, income tax paid during the fiscal year, equity capital, number of employees, tangible assets, etc. On the other hand, foreign group parent companies are not required to disclose this information in Germany; however, assuming the foreign group parent records revenues of €750 million or more, and the Federal Central Tax Office has not received the CbCR from the country of residence of the parent, German subsidiaries are required to disclose the CbCR. In this case, each German group subsidiary is obliged to submit the CbCR, or at a minimum any CbCR data to the extent available (Section 138a(4) GTA).

To sum up, according to Section 138a GTA, there are three scenarios whereby German companies become obliged to file the CbCR in Germany:

  1. the company is the ultimate holding company of the group preparing consolidated financial statements according to German or foreign GAAP (Section 138a(1) GTA) ('resident group holding company');
  2. a foreign parent company employs the German company for surrogate filing (Section 138a(3) GTA) ('appointed resident group entity'); or
  3. the German company should be included in the foreign parent company's CbCR filing, but the Federal Central Tax Office has not received CbCR data; the German company is obligated to submit the CbCR for the group or at least CbCR data that it has access to (Section 138a(4) GTA) ('included resident group entity').

In its annual tax filing, the German company will have to declare into which of the above categories it falls (Section 138a(5) GTA). With regard to the procedure, it is important to note that preparing and submitting a CbCR is a reporting or notification obligation, but not a documentation obligation.


i Pricing methods

In line with the OECD Transfer Pricing Guidelines, Section 1(3) FTA provides for the statutory priority of the standard methods, being the comparable uncontrolled price (CUP), the resale minus and the cost-plus method. If the data available is fully comparable with the tested transaction prices, the full range of such arm's-length values is used. As the application of the CUP method requires very strong comparability, it is only seldom applied. Typically, the CUP method is applied for the sale of fungible goods, taking place at the same level of the commercial chain as well as for financial transactions. The resale minus method is frequently applied for sales and marketing transactions as well as distribution activities. The cost-plus method is mostly applied for the sale of goods by a manufacturer who does not contribute valuable and unique intangibles and does not assume significant risks. The same is true with regard to the provision of services.

If fully comparable arm's-length values cannot be determined, the transfer price method must be based on partly comparable values. In such case, appropriate adjustments must be made, provided they improve comparability, and the resulting range of arm's-length values must be narrowed down, usually to the interquartile range. If the actual transfer price is outside of this range, adjustments are made to the median of the range.

Methods other than the standard methods are the transactional net margin method (TNMM) and the residual profit split method. These methods are regarded as transactional profit methods. Based on administrative regulations, the German tax administration will only accept TNMM if used to price a limited risk 'routine' transaction (e.g., low-risk service provider or manufacturing activities). The residual profit split method is said to be accepted only where standard methods cannot be applied (reliably). The regulations exemplify such a situation by the global trading of financial products and, more generally, by two or more market-facing entrepreneurs making unique and valuable intangible contributions, which are highly integrated.

Transfer pricing methods that are based on global profit allocation, such as the comparable profits method (CPM), are not accepted by German tax authorities.

If neither fully nor partly comparable arm's-length values can be determined, the taxpayer must apply a hypothetical arm's-length range. The range is derived from the maximum price acceptable for the payer (buyer) and the minimum price to be charged by the payee (seller). Once a range between maximum and minimum prices has been established, the price that is most likely to be at arm's-length should be applied. The default value within the range is the midpoint value between the maximum and the minimum price.

Special valuation rules apply for determining a hypothetical arm's-length price for the transfer of a function (business restructurings in OECD terminology). According to these rules, the hypothetical arm's-length transfer price is determined as a 'transfer package'. The transfer package consists not only of the individual assets associated with the production and the sales or service function transferred, but also includes business opportunities, risks and potential location savings, as well as synergy effects.

In line with international standards, German regulations do not provide for safe havens. Arm's-length transfer prices have to be determined case by case, taking into account all applicable facts and circumstances.

Although disputed in lower tax courts (Local Tax Court Münster, 14 February 2014, 4 K 1053/11 E.), the 'Knoppe formula' is a common 'method of last resort' to cross-reference royalty rates. According to the rule, royalty rates should not exceed 33 per cent and should not be lower than 25 per cent of the incremental licensee operating profit. As tax administrators can be expected to rely more and more on profit splits as a result of the BEPS approach of the OECD, and as comparability expectations increase, reliance on the Knoppe formula can be expected to become a more challenging position.

ii Authority scrutiny and evidence gathering

The German tax authorities do not usually conduct special transfer pricing audits but examine transfer prices during the normal course of regular tax audits, which are conducted at regular intervals.

There are specific administrative regulations regarding the selection of companies for an audit (tax audit regulations – Betriebsprüfungsordnung or BpO).

According to the law, German tax authorities have the duty to investigate facts and circumstances neutrally, be they detrimental or favourable for the taxpayer.

The taxpayer has the duty to cooperate and to assist the tax auditor by answering the auditor's questions in written or oral form, and by making available relevant information, notes and documents for inspection. In addition, taxpayers are obliged to submit transfer pricing documentation upon request and provide documents and evidence for cross-border transactions.

In general, the burden of proof that transfer prices are not at arm's length is on the tax authorities. But, if the taxpayer does not fulfil its duties to cooperate or if the transfer pricing documentation is deemed essentially unusable, the tax authorities may in many cases estimate the taxpayer's income based on a rebuttable presumption that the transfer prices as declared in the tax return are not at arm's length. Thus, failure to present appropriate documentation may de facto result in a shift of the burden of proof.

German tax authorities keep expanding their resources in the area of transfer pricing. Many local tax offices have dedicated audit teams specifically trained in transfer pricing and international tax matters. Recently, tax authorities have started building up teams of valuation experts. These focus aggressively on valuations of intangibles, functions and businesses, among others. Within the course of a tax audit, the local tax auditor may refer a valuation question to such an expert acting as an adviser to the tax auditor. In matters of international importance, specialised tax auditors of the Federal Central Tax Office may come in. Typically, transfer price auditors of the Federal Central Tax Office have particular industry expertise.

At the level of the Federal Central Tax Office, extensive statistical information on international tax matters and transfer prices is collected. This information is confidential and is only available to the tax authorities. In a 2001 decision, the German Federal Tax Court ruled that the use of anonymous data does not, per se, violate German tax procedures if the data is presented in a way that allows the taxpayer to assess and comment on the data. This requirement effectively eliminates the tax authorities' ability to rely on anonymous comparables in tax administrative and tax court proceedings. Nowadays, German tax authorities routinely use publicly available databases to cross-check benchmark studies presented by the taxpayer or to conduct their own analyses. Benchmark studies are often used for price-setting purposes. However, the application of benchmark studies as a price-testing approach is recognised in practice.

Transfer price findings continue to be a significant issue in tax audit practice. Key areas of fiscal interest are, in particular, the following:

  1. German distributors or routine-manufacturers reporting low profits or incurring significant losses: in this context, there is a trend among German tax auditors to argue that a loss-making, business-wise autonomous German subsidiary renders market penetration services to the group leading to a cost-plus remuneration;
  2. business changes, transfers of functions and intangible migrations;
  3. royalty charges: fuelled by recent court decisions, German tax authorities increasingly focus on outbound licences for the use of corporate group names;
  4. transfer prices in the context of principal structures (in particular limited risk distributor and intellectual property structures);
  5. remuneration of non-routine service activities and allocation of synergies (i.e., in the context of central procurement companies);
  6. PEs and profit allocation between head office and PE;
  7. remuneration in line with DEMPE functions, arm's-length intangibles remuneration and the economic nexus approach;
  8. trademarks;
  9. intra-group financing; and
  10. recharacterisation of transfer pricing models to profit split models.


In line with OECD BEPS Action Item 5, Germany introduced regulations on the limitation of the deduction of royalties ('licence barrier'), effective as of 31 December 2017. The statute is intended to focus on foreign IP boxes incompatible with the OECD nexus approach. The licence barrier limits the deduction of licence fees as expenditures provided the licensor is a related party; the royalty income of the licensor is taxed under a special regime deviating from the standard rules (preferential regime); and the royalty income is subject to low taxation (below 25 per cent). Two major exceptions are made if the preferential regime is in line with the OECD nexus approach as set out in Chapter 4 of the Final Report 2015 on Action Item 5, or if income is subject to controlled foreign company taxation in Germany. Currently, the Federal Ministry of Finance is reported to analyse whether the US FDII regime triggers limitations of royalty deductions.

Apart from this recent legislative development, tax audits have always focused on the substance underpinning major foreign income abroad and the respective deductions taken in Germany. Against the background of the OECD BEPS project, the aggressive scrutiny of substance has already increased and can be expected to increase further.


Bilateral or multilateral advance pricing agreement (APA) procedures are available, based on double tax treaty rules for mutual agreement procedures (MAPs).

In principle, both unilateral rulings and bilateral and multilateral APAs are available in Germany. However, the Federal Ministry of Finance issued administrative regulations stipulating that in cases where a double tax treaty contains a clause on MAPs, the German taxpayer should not be granted a unilateral ruling. However, where no double tax treaty exists, the tax authorities may, on request, provide the taxpayer with a unilateral APA, provided that the specific case is deemed appropriate and the taxpayer has a bona fide interest.

An APA request does not prevent tax audits. On the contrary, it rather provokes such. In fact, there is a standing administrative practice of cooperation between the Federal Central Tax Office and the local tax audit units.

The APA request has to be filed with the Federal Central Tax Office, it being the competent authority. The scope of application in terms of both content and period has to be defined in the application request. The applicant has to explain the request in detail and provide all the necessary records. The tax authorities may make additional queries at any time and demand further information and documents. In addition, the applicant should also suggest critical assumptions.

For each covered fiscal year, the taxpayer must submit a report to the Federal Central Tax Office stating compliance with the critical assumptions of the APA.

In practice, APAs are usually granted for a period of three to five years. Their term generally commences at the beginning of the fiscal year in which the formal request is filed. An earlier commencement may be allowed if, on the date when the APA request is filed with the Federal Central Tax Office, a tax return has not yet been submitted and the statutory deadline for submitting the tax return has not yet expired. The Federal Central Tax Office may also grant a rollback under certain circumstances, especially if the other country consents.

Further, the EU Mutual Assistance Directive (Directive 2011/16/EU) has been implemented into domestic German tax law (EU-Amtshilfegesetz). The supplement to the Directive provides for the automatic exchange of cross-border tax rulings and APAs on transfer prices between multinational companies ('tax rulings'). In this function, the Federal Central Tax Office provides certain information on tax rulings issued, changed or renewed as of 1 January 2017, to the respective authorities of the Member States ('receiving authority') and the European Commission automatically.


German tax audits are notorious for taking a very down-to-earth approach, focusing on details of facts and accounting. German audit offices do not employ university-trained economists but rely on internally trained specialists, so that proposed transfer price adjustments are regularly short on fact-based, empirically grounded economic theory. This contrasts with the advanced technical and methodical approach of tax audit valuation specialists.

Transfer pricing disputes have traditionally been settled by negotiation and compromise in the audit or in post-audit administrative appeals. This is the reason why there used to be only limited case law on transfer pricing in Germany; however, in view of the increasing aggressiveness of German tax authorities in transfer pricing matters, taxpayers are becoming more willing to take their cases to court. Indeed, the number and frequency of court decisions on transfer prices has increased.


i Procedure

Generally, the following appeal options are available in Germany. The taxpayer can file administrative or court appeals. There are only two court instances. Whereas the local tax court (first instance) both investigates the facts and finds on the law, the Federal Tax Court strictly focuses on a revision of questions of law, be they substantive or procedural in nature (second instance). Where questions of European law are critical for a decision on the case, local tax courts may and the Federal Tax Court is obliged to involve the European Court of Justice. Once legal court instances are exhausted, the taxpayer may raise a complaint to the Federal Constitutional Court for violation of constitutional rights. The Court decides whether to admit the complaint.

In addition to this, MAPs and Arbitration Procedures according to double tax treaty or the EU Arbitration Convention are used successfully to resolve double taxation.

ii Recent cases

The following are some of the most important transfer pricing rulings of the Federal Tax Court since 2000:

  1. There are several decisions relating to the question of whether or not a group subsidiary can deduct royalty fees for a licence to use a branded corporate group name. In 2000 (I R 12/99), the Federal Tax Court ruled that royalty charges for the use of the corporate group name may be tax-deductible if it is a protected trademark or brand name whose use affords valuable benefits to the licensee. However, a later decision by the Local Tax Court of Munich (6 K 578/06) demonstrates that deducting a royalty charge requires effective legal and practical benefits of the licensee. In a recent decision (4 K 1053/11 E) the Local Tax Court of Münster decided that the arm's-length principle requires a licence to be implemented for the use of a foreign entity of a corporate group name when the trademark has value in itself. In 2016 (I R 22/14), the Federal Tax Court reversed this controversial lower court decision. In essence, the court decided that a usage of name rights does not establish a business relationship within the meaning of Section 1(4) FTA, if the right to use is given to the subsidiary on a corporate level (e.g., in consideration of shares).
  2. In a landmark decision of the Federal Tax Court in 2001 (I R 103/00), the court clarified important procedural aspects of transfer pricing rules and regulations, in particular on the burden of proof, transfer pricing documentation, the taxpayer's duty to cooperate with the tax authorities and the use of secret comparables. As a reaction to the ruling, the German legislature introduced important changes in German transfer pricing law (transfer pricing documentation, penalty rules and refinement of the arm's-length principle in Section 1 FTA) that partly supersede the court's decision.
  3. A 2004 decision of the Federal Tax Court (I R 87/02) addresses the arm's-length principle and states that to define an arm's-length price, the positions of both (theoretical) contracting parties, their profit expectations and alternative actions (similar to 'options realistically available' in the 2010 Chapter IX of the OECD Transfer Pricing Guidelines) have to be considered.
  4. In 2005 (I R 22/04), the Federal Tax Court confirmed the principles established in prior rulings that losses incurred by a distribution entity over a certain period of time trigger a rebuttable presumption that the transfer prices are not at arm's length.
  5. In a decision of 2011 (X B 37/11), the Federal Tax Court confirmed the statutory authority for the tax office to assess penalties between €2,500 and €250,000 in the event a taxpayer does not timely fulfil its cooperation duties (e.g., provision of records or documentation) in a tax audit.
  6. In 2012 (I R 75/11), 2014 (I R 23/13) and 2015 (I R 29/14), the Federal Tax Court prescribed the prevalence of double tax treaty rules over Section 1 FTA. In both decisions, the Federal Tax Court decided that based on double tax treaty rules similar to Article 9 of the OECD Model Tax Convention, the arm's-length analysis should be restricted to the testing of the transfer price applied by the parties involved. On 30 March 2016, the Federal Ministry of Finance issued a 'non-application decree' stating that Article 9 of the OECD Model Tax Convention does not refer to a transfer price adjustment but to a profit adjustment instead.
  7. In 2016 (13 K 4037/13 K F), the lower tax court of Münster confirmed that standard transfer pricing methods (CUP, resale minus, cost-plus) are, in general, equal to one another. It is up to the taxpayer and the German tax authorities to determine the most appropriate method for each individual case. To determine arm's-length interest rates on loans within the group, according to the court's assessment of the case, cost-plus shall be the best method. The ruling is currently subject to revision by the Federal Tax Court.


The following penalties for the provision of transfer pricing documentation apply alternatively. They apply both to master files and local files:

If the file is not submitted or is 'essentially unusable', German regulations establish the rebuttable presumption that the income of the German entity has been under-reported and allow German tax authorities to rely on estimated figures and adjust transfer prices at the upper end of the arm's-length range. Further, the tax authorities impose a penalty amounting to at least five per cent, but not exceeding 10 per cent of the income adjustment. The minimum penalty amounts to €5,000.

If the file is 'essentially usable' but submitted late, tax authorities may impose late fees or penalties of up to €1 million with a minimum penalty of €100 for each late day after the due date. Penalties may be waived if the taxpayer is not responsible (or has only limited responsibility) for the lack of appropriate documentation. Separate penalties may be imposed if the taxpayer fails to submit the CbCR at all or on time, or in the event the CbCR is deemed insufficient. Penalties may amount to up to €10,000.

Where adjustments result in an increased tax burden, non-deductible interest will be assessed at a rate of 6 per cent per annum for the period commencing 15 months after the end of the calendar year in which the tax liability arose.


i Diverted profits tax and other supplementary measures

A diverted profits tax is not applicable under German domestic tax law.

ii Double taxation

The EU Arbitration Convention is a potentially useful mechanism to avoid double taxation within the EU. It is also a helpful argument in the course of negotiations with the tax auditors. The Federal Central Tax Office as competent authority has issued administrative regulations offering guidance on both the MAP and the procedure under the EU Arbitration Convention, which clarifies existing practices and the approach of the Federal Central Tax Office in these matters.

If the transfer pricing adjustment leading to double taxation has been initiated by the Federal Central Tax Office, for example, as a result of a transfer pricing audit, the taxpayer may also file a protective action with the local tax court. Usually, legal proceedings can be suspended until after the conclusion of the MAP.

On 3 November 2017, the EU Tax Dispute Resolution Directive entered into force. It will be adopted into domestic law by 30 June 2019. The mandatory dispute resolution rules apply to any double taxation of profits arising as of 1 January 2018. The new dispute resolution mechanisms shall be based on the EU Arbitration Convention and extend its scope beyond transfer pricing disputes. The directive is of particular interest in cases where it is in dispute whether local activities from a permanent establishment are for the non-resident entity.

iii Consequential impact for other taxes

In practice, transfer price adjustments generally neither affect value added tax nor import and customs duties. At the same time, it has become more common for customs auditors to refer to transfer pricing documentation in their investigation.


German tax and transfer pricing law has been complex and rich in detail for some time. Current and future measures of anti-tax avoidance will create further complexities and uncertainties in interpretation. Aggressive audit scrutiny and proposed adjustments of transfer prices will likely continue to rise. Factual representations in audit may meet with considerable scepticism. Strong factual documentation as well as precautionary monitoring of compliance with transfer price policies are cornerstones of audit defence. In view of the growing intensity and size of transfer price disputes, knowledge of their procedural specifics becomes vital for successful defence. Tax controversies on transfer prices are becoming more frequent and often involve more than €100 million in adjustments. Transfer price planning continues to be possible but requires more business interaction by the in-house tax function and a higher level of preparatory analysis.


1 Stephan Schnorberger is a partner and Lars H Haverkamp is a senior associate at Baker McKenzie.

2 Section 90 General Tax Code, complemented by Gewinnabgrenzungsaufzeichnungsverordnung, GAufzV.