Germany: 238. High Court Issues Major Transfer Pricing Decision

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The Federal Tax Court has handed down a major transfer pricing decision dated 17 October 2001 (released in mid-November). The new judgement decides an appeal of a December 1998 decision by the Düsseldorf Tax Court that attracted attention primarily because of the lower court's rejection of the use of so-called secret comparables in transfer pricing litigation. In May 2001, an interlocutory ruling by the Federal Tax Court in the same matter signalled the high court's unwillingness to uphold the transfer pricing documentation requirements that had been proposed by the German tax authorities.

The judgement must be regarded as a victory for the tax authorities in that the high court overturns the lower court's judgement pursuant to the tax authorities' appeal and remands the case for further deliberations. The taxpayer's cross-appeal on a narrow technical issue is rejected.

While the judgement does address the issue of secret comparables, holding that their use by the tax authorities cannot be ruled out categorically, the main thrust of the court's opinion is directed to fundamental questions of methodology and burden of proof in transfer pricing litigation in the context of Germany's present statutory framework. The judgement may be expected to have considerable impact on future transfer pricing litigation.

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