Transfer Pricing

The documentation requirement under § 90(3) AO applies to all taxpayers with cross-border transactions with related parties (§ 1(2) AStG). For extraordinary business transactions — in particular transfers of functions — a six-month preparation period applies after the end of the financial year. If the documentation is absent or unusable, the tax authority levies a surcharge of 5–10 % of the additional amount — with a minimum of EUR 5,000 (§ 162(4) AO). For late submission: a minimum of EUR 100 per day, up to EUR 1,000,000.

A concession exists for smaller companies: where intra-group supply of goods did not exceed EUR 6 million and other transactions did not exceed EUR 600,000 in the preceding year, full documentation requirements do not apply under § 6 of the Transfer Pricing Documentation Ordinance (GAufzV). This does not, however, release the taxpayer from the substantive arm's length obligation.

Master File (Stammdokumentation) — group-wide overview. Mandatory in Germany under § 90(3) AO once the consolidated group revenue in the prior year exceeds EUR 100 million. The relevant figure is the group's total revenue — not the German entity's own turnover. A German subsidiary with EUR 20 million of its own revenue may be subject to the Master File requirement if the parent company's group revenue exceeds EUR 100 million.

Local File (Einzeldokumentation) — country-specific detailed description: functional and risk analysis, transaction overview and arm's length evidence.

Country-by-Country Report (CbCR) — required once consolidated group revenue reaches EUR 750 million (§ 138a AO): data per jurisdiction on revenue, profit, taxes paid, number of employees and capital.

Both terms refer to the same concept: the Arm's Length Principle is the English OECD terminology for the German Fremdvergleichsgrundsatz under § 1 AStG. Intra-group transactions are to be treated for tax purposes as if independent parties under comparable circumstances had entered into them.

In practice, this means: intra-group prices and margins must fall within the Arm's Length Range — the range of arm's length prices determined by benchmarking analyses using comparable databases.

On a transfer of functions — e.g. relocation of procurement, production or distribution abroad — the so-called Transfer Package must be valued at arm's length under § 1(3b) AStG. This includes all assets, opportunities, risks and location advantages associated with the function.

If the relevant documentation is absent or the agreed price falls outside the arm's length range, the tax authority may proceed to a lump-sum assessment of the entire Transfer Package value. The 30-day submission deadline from the date of the audit notice applies with particular strictness in the case of transfers of functions.

An Advance Pricing Agreement (APA) is a binding advance ruling between the taxpayer and one or more tax authorities on the appropriateness of specific transfer prices for a future period (typically 3–5 years).

Bilateral APAs offer maximum protection: legal certainty in both jurisdictions and no double taxation risk. The effort is substantial, but is clearly worthwhile for recurring high-volume transactions.

Pillar Two provides for an effective minimum tax rate of 15 % per jurisdiction — calculated, however, not on the commercial or tax profit in the conventional sense, but on GloBE Income. This distinct income concept under the OECD Model Rules diverges significantly from the commercial P&L: it provides for substance-based exclusions for payroll costs and tangible assets, specific adjustments for deferred taxes under IFRS, as well as further exceptions that make the actual tax burden in many cases more favourable than a simple “straight 15% test” would suggest.

Where profits are shifted to low-tax jurisdictions through transfer pricing and the effective GloBE rate there nonetheless falls below 15 %, the parent company may be required to make additional payments under the Income Inclusion Rule (IIR) or the Undertaxed Profits Rule (UTPR).

Where the tax authority makes an income adjustment, it increases the tax burden in Germany — without an automatic corresponding adjustment abroad.

Within the EU: In addition to the traditional Mutual Agreement Procedure (MAP) under Art. 25 OECD-MC, an updated arbitration procedure has been available since the implementation of EU Directive 2017/1852. This provides for binding deadlines — a maximum two-year settlement phase, followed by mandatory arbitration.

Outside the EU (e.g. Japan, USA): The bilateral Mutual Agreement Procedure under the applicable Double Taxation Treaty (DTT) is the only available remedy. Those who act proactively apply for a bilateral APA — this is the only way to permanently eliminate the double taxation risk before it arises.

Errors without intent primarily lead to additional tax assessments and interest charges. Criminal law relevance arises in cases of wilfully incorrect statements (§ 370 AO, tax evasion) or deliberately manipulated documentation. Particular care is required with documentation prepared retrospectively or adapted to arguments raised by the auditor.

DAC6 (EU Directive 2018/822, §§ 138d et seq. AO) requires the reporting of cross-border tax arrangements with certain hallmarks. Relevant in the TP context: Hallmark E.1 (hard-to-value intangibles in transfers of functions), Hallmark E.2 (intra-group transfers with EBIT reduction > 50 %), Hallmark E.3 (use of unilateral safe harbours).

Under § 147 AO, the retention period for tax-relevant records is 10 years. Since tax audits cover multiple assessment periods and appeal and court proceedings can extend this period, in practice a retention period of at least 12–15 years is recommended for core transfer pricing documentation.

Particularly important: APAs and mutual agreement procedures may relate to facts far in the past. Comprehensive documentation of the original transaction terms is therefore of considerable value retrospectively as well.