Transfer Pricing guide: Germany

Is the jurisdiction part of OECD/G20 Inclusive Framework on BEPS?

Yes, Germany is a member of both the OECD and the G20 and has joined the OECD/G20 Inclusive Framework on BEPS. As a member jurisdiction, Germany has actively implemented various BEPS-related measures, including mandatory transfer pricing documentation requirements, country-by-country reporting, and revisions aligned with the OECD Transfer Pricing Guideline (§ 90 (3) General Tax Act).

Relevant Transfer Pricing regulation

• § 1 Foreign Tax Act (dt. „Außensteuergesetz – AStG“)
• Constructive dividend, § 8 (3) Sentence 2 of the Corporate Income Tax Act (dt. „Körperschaftsteuergesetz – KStG")
• Hidden capital contribution, § 4 (1) of the Income Tax Act (dt. „Einkommensteuergesetz – EStG") and § 8 (3) Sentence 3 of the Corporate Income Tax Act (dt. „Körperschaftsteuergesetz – KStG")
• Contribution (§ 4 (1) Sentence 8 of the Income Tax Act (dt. „Einkommensteuergesetz – EStG") or withdrawal (§ 4 (1) Sentence 2 of the Income Tax Act)
• Transfer Pricing Documentation Ordinance (dt. „Gewinnabgrenzungsaufzeichnungs-Verordnung - GAufzV“)
• Business Function Relocation Ordinance (dt. „Funktionsverlagerungsverordnung – FVerlV“)

Is this regulation aligned with the OECD Guidelines

The OECD Guidelines serve as a supportive reference for domestic application, and German transfer pricing rules are generally aligned with them. However, the OECD Guidelines are not legally binding in Germany, and certain differences exist between the German regulations and the OECD approach. For instance, Germany has implemented stricter interpretations in some cases.

Documentation Threshold for Preparation of Local File/ TP Documentation

Germany applies materiality thresholds for the obligation to prepare transfer pricing documentation, with certain exemptions granted to small and medium-sized enterprises. A full documentation might not be required if annual payments or receipts from related-party cross-border transactions involving the transfer of goods do not exceed EUR 6 million, and if those involving other types of intercompany transactions (e.g., services) do not exceed EUR 600,000. Once either threshold is surpassed, full documentation requirements apply to each transaction individually, regardless of size. There is no separate materiality exemption per transaction beyond these overall thresholds. Documentation requirements apply subsequent to the year in which the the thresholds were exceeded.

There are no other materiality limits for the preparation of Local Files than the general "de minimis". However, the arm's lenght principle applies for all entities regardless they exceed the threshold. In case of a tax audit, also small and medium-sized enterprises can be asked to provide an economic analysis to support the arm's length character of the intercompany prices.

Documentation Threshold for Preparation of Master File

The Master File is mandatory if the turnover of the German entity exceeds €100 million, according to § 90 (3) Foreign Tax Act. Turnover comprise both internal and external revenue. The content is based on OECD requirements and includes amongst others the group organizational structure, overall TP policy, and global business overview.

Documentation Threshold for Preparation of Country by Country Report

The Country-by-Country Report (CbCR) is mandatory if the consolidated revenue of the MNE group exceeds €750 million in the preceding fiscal year.

Submission of Local File, Master File, and CbC Report Required? If so, when?

Starting from January 1, 2025, the following deadlines apply for the submission of transfer pricing documentation in Germany:
The Master File and documentation for extraordinary transactions must be submitted within 30 days upon receipt of the tax audit notification, as well as the transaction matrix.

The transaction matrix includes:
a) the subject matter and the nature of the business transactions (for example, delivery of goods and ongoing business events),
b) the parties involved in the business transactions, marking the service recipient and provider,
c) the volume and the remuneration (in euros) of the business transactions (for example, loan volume and interest or payment for a delivery of goods or services),
d) the contractual basis (identification of the contract document),
e) the applied transfer pricing method (for example, cost-plus method or comparable uncontrolled price method),
f) the affected tax jurisdictions, and g) whether business transactions are not subject to regular taxation in the relevant tax jurisdiction.

After reviewing the transaction matrix, the tax auditors can request more information to be shared within 30 days; either separate and transaction-specific information or the whole Local File. Additionally, the German Tax Authorities have the right to request all transfer pricing related documentations at any time within 30 days.
The Country-by-Country Report (CbCR) must be filed within 12 months after the end of the respective fiscal year.

If No Submission Required, any Other Deadline?

N/A

Other Documentation Requirements

The documentation has to be written and submitted in German, but taxpayers can apply for submitting it in a foreign language. In most cases, English or partially English TP documents are accepted. The documentation must include: detailed functional and risk analysis, description of the intercompany transactions, business strategies, contractual terms, economic analysis with benchmark studies or other internal data used for the arm's lenght test, financial data (segmented financial data if needed), and explanations of the TP method selection.

Does TP documentation / Local file Need to be Prepared Contemporaneously with Tax Return Filing (i.e., before filing the return)?

While contemporaneous documentation is not required for standard intercompany transactions under current regulations, extraordinary business transactions must be documented contemporaneously — no later than six months after the close of the fiscal year in which the transaction occurred. Extraordinary transactions typically include non-recurring, significant or unusual transactions such as business restructurings, asset transfers, or one-time major contracts that deviate from the regular course of business.

Preparation of TP Return Required?

No

Deadline for TP Return Filing

N/A

Key information to be included in the TP Return

N/A

Local vs Regional Comparables Set

Generally, it is preferred to use local benchmarks. Although, European benchmarks are accepted if there is no data from local benchmarks available. The quality and availability of benchmark data is one of the biggest points of contention in tax audits.

Single-Year vs Multi-Year Analysis

German tax authorities accept multi-year testing (since they reflect the economic impact of business, product, and economic cycles as well as special effects). In certain cases, single-year testing might be more appropriate.

Public vs Private Comparables

Public company data is preferred due to transparency. Private company data may be used if reliable and adjustments are made. The quality of the data and justification for selection are critical.

Interquartile Range or Full Range

German tax authorities prefer to use the interquartile range to test the arm`s-length nature (§ 1 (3a) Sentence 3 of the Foreign Tax Act) to eliminate outliers.The full range might only find acceptance if a full comparabilty of the identified comparable entities is given which is usually not the case.

Transaction-Based or Aggregate Approach, or Both

The (single) transaction-based approach is preferred. Aggregate methods may be accepted for highly integrated transactions or in cases involving multiple closely related transactions. The selection and application of criteria depend on the specific facts and circumstances of each case.

How Often are Benchmarking Sets Renewed (financial update versus full scope BMS preparation)

There are no legal requirements to do an update on the benchmarking study and/or financials. However, full benchmark studies are recommended to be renewed every 3 years. Financial data (profit margins, ratios) shall be updated annually to reflect current financials of the comparables.

In Case of Delayed Submission of Documentation

• Late filing of Country-by-Country Report (CbCR):
Penalty of up to EUR 10,000 (§ 379 (2) No. 1c, (5) German Fiscal Code – AO)

• Late or non-timely submission of general TP documentation:
Penalty of up to EUR 1,000,000
Minimum fine of EUR 100 per day of delay (§ 162 (4) AO)
Additional penalty of up to EUR 250,000 may apply if documentation is not submitted on time during a tax audit (§ 146 (2c) AO)
Penalties are non-deductible for tax purposes.

• New rules applying to fiscal years after December 31, 2024 (DAC 7 implementation):
Stricter requirements with graduated penalties based on the timing and quality of the documentation.
Transaction-based assessment of documentation quality.

• Non submission of the transaction matrix:
According to the BMF guidance, failure to submit the transaction matrix result in a penalty payment of EUR 5,000 (§ 162 (4) Sentence 1 Foreign Tax Act).

In case of Income Adjustments in Course of a Tax audit

For income adjustments the following scenarios have to be distinguished.

• Submission of no or insufficient documentation (Local File):
A rebuttable presumption applies that the taxpayer has reduced taxable German income through inappropriate transfer prices (§ 90 (3) AO) this allows the Tax authorities to estimate the in their view correct German income (§ 162 (3) AO). The burden of proof is then with the taxpayer.

• Submission of sufficient documentation (Local File):
If the Local File is generally sufficient, but the actual margin of the tested party falls outside the of an arm’s length range (i.e. the determined interquartile range), an income adjustment will be made by Tax Auditor according to § 1 (1) AStG if the German taxable income was reduced. For the income adjustment, the median generally will be applied (§ 1 (3a) AStG), unless the taxpayer can demonstrate that another value within the range is more appropiate.
It is further important to point out, that tax auditor is only bound to make an income adjustments if the German taxable income of the audited entity has been reduced. I. e. income adjustments for the benefit of the taxpayer are not covered by the German rules.

• Penalty for missing, incomplete, or unusable documentation:
Between 5% and 10% of the income adjustment, with a minimum of EUR 5,000 (§ 162 (4) AO
This penalty applies regardless of whether an actual income adjustment is made, solely based on the documentation deficiency.
Documentation not prepared in a timely manner is considered unusable, potentially triggering the same consequences. //

• Interest of 6% p.a. on tax arrears (§ 238 (1) AO)
Not tax-deductible
Interest on tax payments on income adjustments a accrues starting 15 months after the end of the calendar year in which the tax arose (§ 233a AO)
As of January 1, 2019, the interest rate has been adjusted to 0.15% per month (1.8% p.a.), (§ 238 (1a) AO)

APA & MAP Availability

In Germany, taxpayers can apply for bilateral or multilateral Advance Pricing Agreements (APAs) on transfer pricing matters. Unilateral APAs are generally not granted if a double tax treaty with a Mutual Agreement Procedure (MAP) exists.

The APA process is now based on the 2021 guidance on international mutual agreement and arbitration procedures, and § 89a of the German General Tax Code provides the legal basis. APAs may also cover non-transfer pricing issues. Fees are EUR 30,000 for a new APA and EUR 15,000 for a renewal, with reduced rates for non-TP cases and small taxpayers.

The Federal Central Tax Office is responsible for APA administration. / Taxpayers in Germany can request a Mutual Agreement Procedure (MAP) under a double tax treaty, the EU Arbitration Convention, or the EU Directive on Tax Dispute Resolution (applicable from FYs starting 1 January 2018). The request must be submitted formally and on time to the Federal Central Tax Office, including a factual and legal explanation. It must be filed within three years of the first notification of the issue.
MAPs are also accepted in cases of bona fide foreign-initiated adjustments. The current procedures are outlined in the revised guidance dated 27 August 2021.

MAPs are widely accepted as an effective tool to eliminate double taxation. Within the EU, binding arbitration is ensured under the EU Dispute Resolution Directive, providing legal certainty and enforceable outcomes in unresolved cases.

Applicability of Safe Harbour Rules

Aside from the previously mentioned de minimis thresholds for transfer pricing documentation, Germany does not provide any formal safe harbor rules for taxpayers.

Critical Transfer Pricing Issues Prevailing in the Jurisdiction, if any

Companies may attract increased scrutiny from tax authorities if they:
• are a routine entity reporting losses over multiple years,
• undergo significant structural changes such as business reorganizations,
• maintain cross-border transactions with affiliates situated in low-tax jurisdictions,
• are engaged in substantial intercompany financing arrangements or arrangements including intangible assets.

Criteria/ Guidelines for Transfer Pricing Audit/ Assessments by Tax Authority

In Germany, the general statute of limitations for tax assessments is four years, beginning at the end of the calendar year in which the tax liability arises. The tax liability generally arises at the end of a calendar year, i.e. § 30 Corporate Tax Law or § 36 Income Tax Law/ § 18 Trade Tax Act, when the underlying transaction is realized or when the tax return is due. In cases of tax fraud, this period extends to ten years.

The limitation period typically starts once the tax return is filed, but no later than three years after the tax liability arose. Tax audits can interrupt the limitation period. Additionally, tax assessments may be amended within one year following a Mutual Agreement Procedure (MAP) or EU arbitration decision, even if the standard limitation period has expired.

While intercompany transactions are not subject to special time limits, business restructurings involving the transfer of significant intangible assets the transfer price may be adjusted retroactively for up to seven years under § 1a of the Foreign Tax Act (this can be avoided by including a price adjustment clause in the contract). T

Relevant Regulations and Rulings with Respect to Thin Capitalization or Debt Capacity in the Jurisdiction

Germany does not apply traditional thin capitalisation rules based on fixed debt-to-equity ratios. Instead, interest deduction limitations are primarily governed by the so-called interest barrier rule (Zinsschranke), which plays a central role in assessing the deductibility of intercompany interest expenses. The relevant provisions are found in § 4h of the Income Tax Act and § 8a of the Corporate Income Tax Act.

Additionally, inbound financing structures may trigger the application of German controlled foreign company (CFC) rules under § 7 of the Foreign Tax Act, particularly where low-taxed passive income is involved. In the case of cross-border group financing, interest expenses are only tax-deductible if the taxpayer can demonstrate that, from the outset, they were realistically able to service the debt (interest and principal) over its entire term, that the financing was economically necessary and not merely undertaken for tax reasons, and that the funds were used for genuine business purposes. If this three-step test is not passed, the interest cannot be deducted for tax purposes.

For cross-border intra-group loans and the determination of intercomany interest rate the German approach differs from OECD. the interest rate may not be higher than the rate the company would pay to an independent lender, based on the group’s credit rating. As a rule, the group rating is used to determine a market-based interest rate. Only if it can be proven that the borrower’s own credit rating is better than the group credit rating, the stand-alone rating of the borrowing entity may apply, which usually results in a lower interest rate.

If there is no formal group rating, the rating of the ultimate parent company is used instead. If the actual intra-group interest rate is higher than the arm’s-length rate derived from this rating, the excess portion of the interest is not deductible for tax purposes. In practice, this may result in double taxation with countries using the stand-alone rating of borrower to determine an arm's lenght interest rate.

If a group company merely passes on or facilitates the transfer of funds (for example, through intra-group loans or liquidity or currency management), this is generally regarded as a routine activity. In such cases, this company shall only receive a risk-free, relatively low return – in other words, a kind of secure standard rate of return, i.e. a cost-plus remuneration (§ 1 (3e) Foreign Tax Act).

In cases of inbound loans granted by related foreign parties, extended documentation obligations need to be considered pursuant to § 1 Abs. 3d AStG. The German taxpayer has to provide detailed information on the terms and conditions of the financing arrangement, the business reasons for the loan and a cash flow based solvency test showing that the German borrower can pay the intercompany interests.