Germany: 051d. Transfer Pricing - Where We Stand - The German Position

Last Updated: 31 July 1996
KPMG Germany Webpage
Click on the above link to visit the KPMG Germany webpage on the Mondaq website
For disclaimer and copyright see end of this article.


1.1 Present German Transfer Pricing Policy
1.2 Future German Transfer Pricing Policy
1.3 APAs In Germany
1.4 German Transfer Pricing Case Law
    Formal Requirements
    Domestic Marketing Subsidiary
1.5 German Administrative Principles: Selected Topics
    General Characterisation
    Standard Method
    Costs Of Advertising And Market Penetration
    Costs Of Defending Or Expanding Market Share
    Inter-Company Loans, Administrative Services, Intangibles, Cost 
    Procedural Matters


1.1 Present German Transfer Pricing Policy

The German transfer pricing policy is based on the arm's length standard and set forth primarily in a directive issued by the Ministry of Finance on 23 February 1983. The directive has not been changed since its issuance. A complete English translation exists in Bellstedt, International Transactions Tax Act and Administration Principles on Income Allocation, 4th revised edition, Otto Schmidt, Cologne, 1994. As printed in this dual language (German/English) edition, the directive is some 45 pages in length. The present directive applies by its terms only to transfer pricing between related parties and does not address the controversial issue of allocation of income and expense between a permanent establishment and its headquarters or head office.

The legal bases of transfer pricing adjustments is found, for corporations, in the German doctrine of constructive dividends and constructive contributions to capital, and, subsidiary thereto, in sec. 1 AStG (Foreign Transactions Tax Act). In particular the tax effect of an adjustment treated as a constructive dividend can be very different from a simple increase in taxable income (see German News no. 4/95 p. 9 ff. = Art. no. 39 for a basic discussion of constructive dividends).

1.2 Future German Transfer Pricing Policy

The German tax authorities indicated as early as two years ago that they plan to withdraw the current directive and issue revised transfer pricing guidelines. This is currently not anticipated until 1997 at the earliest. While opinions within the Ministry of Finance are thought to differ on certain points, there is at present no indication that major changes in the current Administrative Principles are planned. The German negotiating position in the OECD deliberations likewise gave no indication that the Ministry of Finance regards the current directive as seriously defective in any area.

The revised Administrative Principles are in particular not expected to recognise the controversial profit-oriented OECD income determination methods (transactional net margin method, profit split method). Simultaneously with the release of the first five chapters of the OECD Guidelines, the Ministry of Finance issued a formal press statement declaring that "since the Federal Republic of Germany considers the traditional methods to be adequate, it does not employ profit-oriented methods (in particular TNMM) except for purposes of verification [of another method] or estimation."

In the same press statement, the Ministry of Finance noted that penalties imposed without regard to fault were contrary to the German legal system.

Also underway is a new directive providing guidance on the allocation of income and expenses to permanent establishments. At least two drafts have been produced so far by the Ministry of Finance. Neither has been made public. It is difficult to estimate when the directive may be issued. Since the OECD has also indicated that it will take a position on this issue, it appears likely that Germany will await the OECD's paper before taking action of its own.

1.3 APAs In Germany

Directives issued by the Ministries of Finance of Baden-Wuerttemberg and Bavaria (dated 28 Nov. 1994 and 9 Jan. 1995 respectively) state that the German tax authorities can enter into advance pricing agreements and cooperate in connection with APA proceedings pending before a foreign tax administration. This represents a significant change in the attitude of the German tax authorities in that they previously refused to make transfer pricing the subject of advance rulings. The legal basis for German APAs is found in the existing directives issued by the tax authorities regarding binding private letter rulings in general (for unilateral APAs) and in the mutual agreement clauses of Germany's tax treaties (for bilateral APAs).

The German position on APAs may be summarised as follows:

1. Rulings equivalent to an APA are available. Germany is also willing to join in a foreign APA proceeding.

2. When cooperating in a foreign APA proceeding, Germany will probably either insist that all information supplied to the foreign tax authorities be made available to it as well or else be very cautious in accepting the results of the foreign APA.

3. Because of staff shortages, Germany will only become involved in unilateral or bilateral APA proceedings in exceptional cases. The directives do not indicate what cases will be considered exceptional. The fact that a foreign APA proceeding is pending will, however, apparently not constitute an automatic exception.

4. An APA issued by a foreign taxing authority will not bind Germany.

5. German tax auditors will routinely inquire whether a company under audit has concluded any APA's with other countries and review these so as to make sure that German tax revenue has not been diminished in a manner inconsistent with the arm's length rule as articulated in the German's 1983 Administrative Principles.

German tax officials have made remarks in public to the effect that German disagreement with a foreign APA secured without German participation may cause the German tax authorities to deny support to the taxpayer in any mutual agreement proceeding initiated to avoid double taxation.

Procedurally, authority to issue an APA rests with the local tax office with jurisdiction over the taxpayer, not with a central national office. Local tax offices have instructions to consult with regional and national offices in suitable cases and to by all means ensure that the local audit personnel is involved. Since bilateral APAs have their legal foundation in tax treaty law, they may be initiated by application to the competent authority under the treaty, i.e. the Federal Ministry of Finance.

1.4 German Transfer Pricing Case Law

There is little German transfer pricing case law since most transfer pricing disputes are settled in negotiations with the tax authorities at the time of tax audits. We wish to call attention to two basic concepts developed out of the case law.

Formal Requirements

A deduction for expense incurred in favour of a related party will only be accepted for tax purposes if, in addition to being in accordance with the arm's length principle, the expense is incurred pursuant to a clear and unequivocal agreement entered into in advance of the transaction in question (cf. Admin. Principles par. 1.4.1). Written form is highly advisable for such agreements, as otherwise there may be evidentiary difficulties. An agreement entered into may also be disregarded if performance of the agreement is not in accordance with the terms thereof. Lastly, it follows from the requirement that the agreement be entered into in advance that no retroactive effect will be recognised for tax purposes.

Domestic Marketing Subsidiary

What may be called the leading German case on transfer pricing (BFH BStBl II 1993, 457 - 17/02/1993) was decided over three years ago by Germany's highest tax court. The case dealt with the failure of a domestic marketing subsidiary to earn a profit, in part because it had assumed advertising costs in connection with introduction of the parent company's products on the German market. The court held that a reasonable businessman would only agree to market the products of another if a conservative marketing analysis conducted in advance indicated that he would earn a reasonable overall profit within a foreseeable period, taking account of the anticipated market development. Applying this arm's length standard to a domestic marketing subsidiary, the court in effect held that the subsidiary must prepare an advance market analysis and long-term budget and sales planning based on sound business administration principles which indicated that the subsidiary would enter the profit zone after a start-up loss phase which should generally not exceed three years. The court did not say how soon a marketing subsidiary should turn an overall profit, but a window of 5 - 7 years is thought to be reasonable, depending on specific circumstances. The court also did not say how to determine what profit was reasonable. Absent unforeseen events resulting in considerable non-budgeted cost, the subsidiary was, however, expected to perform as budgeted.

The decision compels taxpayers to confront the transfer pricing issue at the outset of their marketing activities. Specifically:

  • Advance market analysis and budget planning must be prepared;
  • This planning must indicate a limited start-up loss phase and forecast a reasonable overall profit within the foreseeable future;
  • Advertising and market introduction expense must be assumed by the parent to the extent necessary to show an acceptable result in the long-range budget planning.

It remains possible to show that unforeseen circumstances prevented the subsidiary from earning the expected profit. Furthermore, the decision has to be applied on a product or product line basis. Obviously, when a marketing subsidiary adds a new product line after commencing some years before with an initial product, the budget planning and start-up loss phase for the new product line can cause the company to remain in the loss zone overall, even though the original forecast, based on the initial product only, had indicated an earlier end to start-up losses.

1.5 German Administrative Principles: Selected Topics

General Characterisation

The current German Administrative Principles are general in nature and recognise the need for intelligent application in light of the circumstances of a particular case (par. 1.1.4). They stand firmly on the basis of the arm's length principle (par. 2.1.1) and are intended to guide the taxpayer and the tax authorities in applying this principle. They seek to employ a "reasonable businessman" standard, recognising that sound business discretion is implicit therein (par. 2.1.8) and seeking only to prevent relatively clear abuse of such discretion (par. 2.1.9). They establish no order of priority among transfer pricing methods, permit a mixture of methods, and direct the tax authorities to base their examination on the method used by the taxpayer (par. 2.4.1, 2.4.2). The standard of review is whether the taxpayer's transfer price structure is "appropriate" (sachgerecht) and yields results of "reasonable precision" (hinreichende Genauigkeit) (par. 2.4.3). The taxpayer is not entitled to use methods which are in conflict with market conditions or for which he is unable to present "the required documentation" (par. 2.4.4). The concept of "required documentation" is, however, not further defined and hence left to the sound judgement of the taxpayer and the tax auditor. For exceptional cases involving transactions in which independent third parties would not have engaged at all or on a significantly different basis, "a reasonable division" of the income from the transactions is permitted (par. 2.4.6). While giving guidance with respect to certain types of transactions, the Administrative Principles purposefully leave much to the sound judgement of the taxpayer and the tax examiner and overall reflect the unstated conviction that the uniqueness of each transfer pricing situation makes overregulation counterproductive and scientific precision impossible. As remarked above, there is no evidence that the recent OECD debate has prompted the German tax authorities to alter their basic stance.

Standard Methods

The Administrative principles define three standard methods which can be combined and refined as individual circumstances indicate:

  • Comparable uncontrolled price method
  • Resale price method
  • Cost-plus method


Offsets are permitted, though only with respect to transactions in some way interconnected and subject to the conditions that the compensating advantage was agreed or incorporated in the disadvantageous transaction from the start and is realised within three years (par. 2.3). The German requirements on offsets are thus fairly strict in international comparison.

Costs Of Advertising And Market Penetration

The Administrative Guidelines are flexible as to the division of these costs depending on the anticipated benefit, but make clear that the domestic marketing subsidiary cannot be saddled with these costs without compensating advantage (par. 3.3, 3.4). Furthermore, the court decision discussed under sec. 1.4 above makes clear that these costs must not interfere with the subsidiary's prospects for an adequate middle-range overall profit.

Costs Of Defending Or Expanding Market Share

The Administrative Guidelines insist, somewhat illogically, that these costs "generally" be borne by the manufacturer. Here again, the German position is restrictive in international comparison.

Inter-Company Loans, Administrative Services, Intangibles, Cost Sharing

The Administrative Principles contain sections on each of these topics. With respect to administrative services, an attempt is made to distinguish services which benefit a group subsidiary, for which a charge may be made, from the general benefits of membership in an international group (Rueckhalt im Konzern), the exercise of the shareholder function, and overseeing/monitoring by the group parent in its own interest, charges for which are not accepted. Cost sharing arrangements (indirect charge methods) are allowed where charging on an individual basis is factually impossible. The only detailed record-keeping provisions in the directive relate to cost sharing arrangements (par. 7.4). An expert opinion by a German auditing company is allowed as an alternative to submission of certain cost-sharing documentation maintained abroad (par. 7.4.1).

Procedural Matters

Domestic taxpayers are required to cooperate with the tax authorities and submit the documentation which is required under the circumstances to verify the appropriateness of their transfer prices. Concerning information not within the taxpayer's direct control, the Administrative Guidelines state that the taxpayer is responsible for providing such material to the extent he had a reasonable opportunity to secure for himself the necessary rights thereto against third parties. In general, this is interpreted as requiring production of information controlled by foreign related parties (par. 9.1.3, 9.1.4). There are, however, no requirements for production of information in advance of audit. Failure to comply with the duty of cooperation entitles the tax authorities to estimate the tax owing. This is one context in which the transactional net margin method might be used (see sec. 1.2 above).

German courts have held that the tax authorities bear the burden of proof in transfer pricing disputes.

Germany has no penalty provisions specifically directed to transfer pricing controversies. Under general principles, penalties are only imposed for criminal conduct and for certain intentional or reckless tax misdemeanours.

Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions