Germany: New transfer pricing guidelines

Transfer pricing is a hot issue at a time when all finance ministries are searching for funds to cover their exorbitant budget deficits. The German Ministry of Finance has issued new transfer pricing guidelines (Verwaltungsgrundsätze Verrechnungspreise). Certain topics intersect with Czech guidelines and judicial practice.

Below, we comment on selected new German guidelines in relation to the Czech environment:

  • The definition of related parties has been extended to cover unrelated parties showing signs of a common business interest. This concept has already been outlined in the Czech Income Tax Act (a relation established predominantly for the purpose of reducing a tax base or increasing a tax loss) and has been the subject of numerous judicial decisions on marketing expenses.
  • Under the new guidelines, the German tax authorities should focus not only on price assessment (i.e. quantitative aspects) but also on whether the agreed conditions of a transaction are in line with the arm’s length conditions (i.e. qualitative aspects). The question is whether this approach will also be applied to permanent establishments. Here we can expect to see an increase in disputes over what arm's length conditions are.
  • An interesting approach has been proposed for loss-making routine entities, i.e. contract manufactures or distributors. Here, a test of cumulative profits over a five-year period is recommended. The test can be applied prospectively or retrospectively, depending on the circumstances of the case.

The guidelines are comprehensive and address also other specific issues such as intangible assets or financial transactions. Given the importance of our western neighbour, it is to be expected that some of the new ideas and approaches contained in the guidelines will sooner or later make their way into our environment. 

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