CMS Expert Guide to Transfer Pricing Documentation in Germany

In Germany, specific requirements for transfer pricing documentation have been enacted since 2003. Pursuant to section 90, para. 3 of the German General Tax Code (Abgabenordnung), the taxpayer must prepare transfer pricing documentation concerning all cross-border transactions with related parties. Furthermore, the taxpayer must deliver supporting evidence for such transactions. Therefore, inter-company transactions generally must be evidenced by written agreements in order to be accepted by German tax authorities. Any agreement must be concluded before the respective transaction is executed, and their terms must be complied with in full. 

The transfer pricing documentation obligations consist of the explanation of the facts and circumstances and the economic and legal basis supporting the arm’s length nature of the agreed conditions as well as the information used at the time of the price setting and the transfer pricing method applied to arm’s-length data. These documentation obligations are covered by the Local File’s requirements. 

In addition, the law specifies that German taxpayers that are part of a multinational group and whose revenue from related and unrelated party transactions in the previous financial year amounts to at least EUR 100 million should prepare the Master File. 

Besides this, for exceptional business transactions (e.g. internal restructurings or the conclusion of long-term agreements), documentation must be prepared contemporaneously, which is defined to mean within six months of the conclusion of the fiscal year at the latest. 

Less strict transfer pricing documentation requirements may apply in Germany for small and medium-sized enterprises. Taxpayers that fall within the scope of the relief do not have to prepare and submit Transfer Pricing Documentation but must present all underlying business papers and records in relation to the determination of the transfer price. A taxpayer is eligible for relief if the consideration received for intercompany supplies of goods is less than EUR 6 million and less than EUR 600,000 for all other categories of transactions per fiscal year. To qualify for relief, the taxpayer's remuneration for both types of intra-group transactions must be below the thresholds. Relief is granted for the year if neither threshold was exceeded in the previous year. 

Pursuant to section 90, para. 3 of the German General Tax Code (Abgabenordnung), the taxpayer must deliver transfer pricing documentation for all cross-border transactions with associated enterprises or transactions outside Germany. This is subject to an exemption where the value of all associated party transactions concerning goods and products does not exceed EUR 6 million per fiscal year, and the sum of all remuneration for all (other) services does not exceed EUR 600,000 per fiscal year. Once these thresholds are exceeded, the transfer pricing documentation requirements apply on a transaction-by-transaction basis without a separate materiality threshold for each transaction

A definition of “associated enterprises” is included in section 1 para. 2 of the German Foreign Tax Act (Außensteuergesetz).  

A party is related to the taxpayer if:  

1. the party in relation to the taxpayer, or the taxpayer in relation to the party,  
   1. holds a stake of at least one quarter directly or indirectly in the subscribed capital, membership rights, participation rights, voting rights or company assets (substantial stake), or  
   2. is entitled to at least one quarter of the profits or liquidation proceeds; or  
2. the party is able to exercise a controlling influence directly or indirectly on the taxpayer, or the taxpayer is able to exercise a controlling influence directly or indirectly on the party; or  
3. a third party,  
   1.  holds a substantial stake in both the party and the taxpayer,  
   2. is entitled to at least one quarter of the profits or liquidation proceeds from both the party and the taxpayer, or  
   3.  is able to exercise a controlling influence directly or indirectly on both the party and the taxpayer; or  
4. the party or the taxpayer, when agreeing on the terms of business relations, is in a position to exercise influence on the taxpayer or the party that is not based on such business relations, or if one of them has an own interest in realisation of the other’s income. 

Furthermore, transactions between a permanent establishment and its head office are also subject to transfer pricing documentation requirements. 

German tax legislation on transfer pricing and the decrees issued by German tax authorities do not explicitly refer to the Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the EU (EU TPD). Therefore, the EU TPD cannot formally be chosen as an alternative to local German transfer pricing rules. However, the content of country-specific documentation as set out in the EU TPD is basically also required under German law, although some specific German rules (e.g. further details) must also be considered.  

On the basis of section 90, para. 3 of the German General Tax Code (Abgabenordnung), the German Ministry of Finance has enacted a decree (Gewinnabgrenzungsaufzeichnungs-Verordnung / GAufzV, dated 12 July 2017, BStBI I, 2017, p. 2367) providing details on the documentation required. Further details are, in particular, included in the 2020 Administrative Guidelines (Verwaltungsgrundsätze of 3 December 2020, BStBI I, 2020, p. 1325). In general, the documentation must be based on the single transaction in question, but it is permissible to group comparable transactions if such grouping is determined before the occurrence of the transaction. 

Similarly, as stated in the EU TPD, German rules require that each German entity must provide the following documentation: 

• master data documentation (master file). 
• country-specific and enterprise-related documentation (local file). 

Master file: 

• According to the master file rules, only taxpayers that are part of a multinational group and those whose revenues from unrelated and related-party transactions in the previous fiscal year amount to at least EUR 100m are subject to the requirement to report master file-related information. 
• A multinational group includes at least one foreign enterprise or one foreign permanent establishment (PE). The master file must include an overview of the group’s worldwide activities and details on the transfer pricing system applied to all intercompany transactions between related entities. Details of master file reporting are included in the GAufZV (decree) where reference is made to the recommendation in Action 13 of the OECD BEPS project. 

Local file: 

• According to section 90 paragraph 3 German General Tax Code (Abgabenordnung), each German entity must provide documentation on (i) facts and circumstances, and on (ii) the appropriateness of the transfer prices used. In general terms, the following information must be provided (which may separately be added by further documentation, such as if R&D functions and risks have changed): 
  • General information about the group and ownership’s structure, the business and group organisation (i.e. legal and economical basis (facts and circumstances), such as legal group structure charts, corporate details of related parties, permanent establishments, organisational and operative group structure charts, types of business (e.g. distribution, manufacturing services, etc.), business strategy, market situations, major competitors, overview of intercompany contracts, information on a set-off of benefits, overview regarding tax rulings, Advance Pricing Agreements and Mutual Agreement Procedures, financial statements, development of financial ratios. 
  • Business relations with related parties or with respect to non-German permanent establishments (i.e. type and extent of the business conducted with related parties, such as purchases, sales services, financing, and other use of assets), including overview of flows of goods and services, all relevant agreements concluded (e.g. on goods, services, R&D, licences, leases, loans), overview regarding intangible assets owned by the taxpayer and licensed to related parties, information on how contractual agreements have actually been carried out, etc. 
  • Analysis of functions and risks, description of the value production chain, including function and the associated risk of the taxpayer and the related parties within the particular business transaction, material assets, the business strategy, the relevant market and competition. 
  • Analysis of transfer pricing policy: including description and explanations of the appropriateness of the chosen transfer pricing method, explanations of the appropriateness of the transfer prices applied, calculation records, data about comparable third parties (comparable search), price adjustments and reasons for losses. In this respect, the taxpayer must maintain documentation on the selection and application of its transfer pricing methodology, as well as the point in time when the transfer prices used were established. Such data is necessary to confirm that the taxpayer complied with the arm’s length standard. 
  • If a taxpayer uses databases for calculation of its transfer prices, the respective search methods, criteria used, and subsequent selection process should be disclosed in detail. The entire taxpayer’s search process must be transparent and reproducible in electronic form at the time of the tax audit. The configuration of the database used for the specific search process should also be fully documented. Documentation on paper only is no longer sufficient.

Based on Action 13, the transfer pricing documentation must be formally established as a three-tiered approach (i.e. a master file, local files and a country-by-country report or CbCR) must be set up. In Germany, such three-tiered approach to transfer pricing documentation was implemented in late December 2016 and is applicable for fiscal years beginning after 31 December 2015 and 31 December 2016 respectively. 

In general terms, German rules are in line with the OECD approach. However, in some ways German transfer pricing rules differ from the OECD approach (i.e. in part, more details and stricter rules are required by the OECD, but also German rules exceed the requirements of the OECD guidance).  

In this respect, it should be noted that the German taxpayer is not free to choose between the German rules and the OECD approach. German rules are mandatory and must be seen as a minimum requirement. In Germany the OECD transfer pricing guidelines can be seen as an interpretation aid if the specific topic is not governed by the domestic legislation or by administrative decree. In line with this, reference is made to chapter V of the OECD transfer pricing guidelines in the administrative decrees (Verwaltungsgrundsätze of 3 December 2020, BStBI I, 2020, p. 1325; Verwaltungsgrundsätze Verrechnungspreise 2023 of 6 June 2023, BStBl I, 2023, p. 1093).

According to section 90, para. 2 of the German General Tax Code (Abgabenordnung), the taxpayer has the burden of delivering supporting evidence for all cross-border transactions or transactions outside Germany. This applies to all taxpayers being subject to tax in Germany, irrespective of their location. The taxpayer is obliged to use all existing legal and practical options to achieve this. The requirement extends to requesting information from associated parties if this is relevant for German tax purposes. If the taxpayer involved is directly or indirectly the majority shareholder of a company or controls the majority of the voting rights of a company, the Tax Authorities assume that he has the legal possibilities to obtain information and evidence from the company close to him. In such cases, he cannot successfully claim a refusal to cooperate on the part of the company with which he is closely associated (Verwaltungsgrundsätze of 3 December 2020, BStBI I, 2020, p. 1325). 

In addition, the taxpayer must keep all records and documentation (including electronic data) of the German entity in Germany, unless an exemption applies (e.g. records of a foreign branch are to be maintained at the premises of such branch based on the relevant foreign tax law), or the German tax authorities have agreed to an exemption, such as allowing the taxpayer to maintain documents outside Germany (sections 146 and 148 of the German General Tax Code – Abgabenordnung).

If external (publicly obtainable) data is used, sufficient and comparable data must be available in a database (e.g. Orbis), which is generally accepted by German tax authorities. Such data may be based on regional benchmark studies. However, the most important factor is that the data needs to be comparable to the taxpayer’s particular case. For the comparability test, all factors that could have an impact on pricing shall be taken into account. The identified factors and circumstances need to be recorded in the transfer pricing documentation (Verwaltungsgrundsätze Verrechnungspreise 2023 of 6 June 2023, BStBl I, 2023, p. 1093). Moreover, German tax authorities state that a calculation solely based on database research is not sufficient for determining the appropriate transfer price. The specific facts and circumstances of the underlying case must be considered. External database information generally does not provide for such an individual approach, and the proper determination and documentation of transfer prices requires more detailed consideration (Verwaltungsgrundsätze of 3 December 2020, BStBI I, 2020, p. 1325). 

If electronic database research is carried out, the taxpayer must document all data retrieved, as well as the research process by which the data was extracted. German tax authorities must be able to review the whole research process, which also includes access to electronic data for carrying out their own alternative calculations (section 147 paras. 5 and 6 of the German General Tax Code – Abgabenordnung). In particular, the function of the different entities included in the database needs to be comparable to the function of the tested entity. Furthermore, the German tax authorities often expect the products to be comparable as well as the functions. In practice, data is often averaged over three years in order to eliminate high variances. 

There is no general requirement in Germany to provide tax authorities with benchmark studies based on database research. Nevertheless, such studies are often expected by the tax auditor, as they are internationally common. Furthermore, comparable studies are generally helpful in underlining the transfer prices and the calculation method chosen. 

German tax authorities generally accept the cost-plus method with a mark up of 5% for low value adding intragroup services if this is actually implemented uniformly and demonstrably in the multinational group of companies (Verwaltungsgrundsätze Verrechnungspreise 2023 of 6 June 2023, BStBl I, 2023, p. 1093). 

In principle, the transfer pricing documentation must be submitted in German. However, the taxpayer can apply for transfer pricing documentation to be prepared in a foreign language. The application must be filed without undue delay after receiving a request for submitting transfer pricing documentation. In practice, many German tax auditors accept English transfer pricing documentation reports or are satisfied with receiving a (partial) German translation of the reports. 

According to the currently applicable version of section 90, para. 3 of the German General Tax Code (Abgabenordnung), taxpayers must submit appropriate transfer pricing documentation within 60 days of a request generally made by the tax authorities during a tax audit. It is not necessary to submit such documentation when filing tax returns. The time frame of 60 days is reduced to 30 days for exceptional business transactions (e.g. restructuring or change of sales systems). An extension may only be granted upon application where good reason is shown. 

On 20 December 2022, new legislation was enacted that includes changes to section 90, para. 3 and 4 of the German General Tax Code (Abgabenordnung). Under the new legislation, the taxpayer may be asked at any time to provide transfer pricing documentation reports to tax authorities. In case of a tax audit, the taxpayer will be required to provide transfer pricing documentation to the tax auditor within 30 days of the start of the audit without a further request by tax authorities. In principle, the new legislation applies only to taxes that result after 31 December 2024. However, the new rules are applicable for taxes incurred before this date if they are the subject of tax audits that commence after 1 January 2025. As a result, taxpayers should be aware that the new legislation may apply to the current year or earlier financial years. 

Tax authorities are allowed to charge penalties if the documentation requirements are not fulfilled. The taxpayer must pay a penalty of EUR 5,000 if the documentation has not been produced for a relevant business transaction or if the documentation is materially unusable. However, the penalty will be 5% to 10% of the additional income that is assessed as a result of the non-production of the documentation if this amount exceeds EUR 5,000. If the documentation is produced after the 60-day period or the 30-day period, a minimum penalty of EUR 100 per day will be due, up to EUR 1 million. 

All such penalties do not qualify as taxes and are not tax deductible. 

If all transfer pricing documentation requirements under German law are fulfilled and appropriate transfer prices have been used, the burden of proof is on the tax authorities if they intend to change the income calculation. 

However, if this is not the case, German tax authorities may assume that the taxpayer’s income taxable in Germany is higher than the amount the taxpayer declared (section 162 para. 3 of the German General Tax Code – Abgabenordnung). Thus, if the documentation is insufficient, the burden of proof is shifted to the taxpayer. Tax authorities are allowed to carry out their own calculations and to adjust the tax basis. If there is a range of prices, the tax authorities may choose the point of the price range that is most disadvantageous to the taxpayer. 

No, this does not prevent the taxpayer from initiating a mutual agreement procedure. According to an applicable decree of the tax authorities, the documentation-related penalty can even be reduced as a result of a successful mutual agreement procedure. This is the case if the mutual agreement procedure results in a decrease of the assessed income because the penalty is calculated based on the additional income that resulted out of the non-fulfillment of the documentation requirements (Verwaltungsgrundsätze of 3 December 2020, BStBI I, 2020, p. 1325). However, it is the responsibility of the taxpayer to contribute to the proceedings by presenting the necessary documentation and evidence. 

Not applicable.

In late December 2016, Germany introduced country-by-country reporting rules which generally apply to the tax years starting after 31 December 2015. 

The German CbCR requirement generally applies to fiscal years starting after 31 December 2015. The annual CbCR must be filed electronically with the German Federal Central Tax Office (Bundeszentralamt fuer Steuern) within one year following the end of the fiscal year concerned 

According to section 138a of the German General Tax Code (Abgabenordnung), the domestic group parent company is required to prepare a CbCR if the group financial statements include at least one foreign enterprise or one foreign PE, and consolidated sales revenue in the previous fiscal year amounts to at least EUR 750m. 

A “secondary mechanism” is implemented for domestic entities that are part of a multinational entity group that includes both a “surrogate parent filing” and a “secondary reporting local filing”. With regard to “surrogate parent filing”, the foreign group parent designates the German resident entity to prepare and file the report. Regarding a “secondary reporting local filing”, the German Federal Central Tax Office (Bundeszentralamt fuer Steuern) does not receive a copy of the CbCR filed with the foreign tax authorities. In this case, the German entity would have a filing obligation. 

Furthermore, concerning fiscal years starting after 31 December 2016, a German entity is obliged to indicate in its German tax return whether or not it is a German group parent company, a designated surrogate parent company or a domestic group company of a foreign group parent company (obligation within annual tax returns as of 2017). In the latter case, the German entity is also obliged to specify which group entity will file the CbCR and which tax authority will receive the CbCR. 

The requirements of the German CbCR rules follow the OECD guidance in Action 13 of the BEPS project. Therefore, the information in the CbCR needs to include an overview of the group’s activities, allocated according to the separate tax jurisdictions where the group’s entities or PEs perform such activity. This overview must include the following information based on the consolidated accounts: 

• revenues and other income with related parties 
• revenues and other income with third parties 
• income taxes paid in the respective fiscal year 
• income taxes accrued and paid for the respective fiscal year 
• earnings before income taxes 
• equity 
• retained earnings 
• number of employees 
• essential assets 

Furthermore, a list must be included regarding all entities and PEs by tax jurisdiction for which the abovementioned information is provided, including a description of the main business activities (e.g. research and development, production or intercompany financing) carried out by the respective entity or PE and any other details that might be necessary to adequately explain the information provided. 

In case a required CbCR or a required notification (information of the filing company) has not been delivered to German tax authorities, a penalty of up to EUR 10,000 can be assessed. The same applies if the CbCR or its notification is incomplete or was not delivered on time. 

For EU countries, the legal basis for such exchange is the EU Directive on Administrative Cooperation. For non-EU countries, such exchange is conducted on the basis of the Multilateral Competent Authority Agreement on the automatic exchange of information (CbC MCAA). 

In addition, Germany and the US have signed a competent authority arrangement for the exchange of CbC reports. Since 2017, they have issued several successive joint statements providing for the spontaneous exchange of CbC reports between the two jurisdictions. 

Not applicable.

Other documentation requirements for taxpayers in Germany were introduced with the Tax Haven Defence Act (Steueroasenabwehrgesetz), which came into force on 1 January 2022. The aim of the new law is taking action against tax evasion, tax avoidance and unfair tax competition from non-cooperative jurisdictions (i.e. tax havens). If a taxpayer has business relationships or participations in or with reference to non-cooperative jurisdictions, specific additional documentation requirements apply. These requirements apply to all business transactions with non-cooperative jurisdictions, not only with related parties and/or associated enterprises.   

The relevant non-cooperative jurisdictions are updated once a year at the end of the year in the Tax Haven Defence Ordinance (Steueroasenabwehr-Verordnung). The Tax Haven Defence Act is generally applicable as of 1 January of the following year after a state has been included in the list of non-cooperative jurisdictions. 

Currently, the following states are on the list: 

• American Samoa 
• Anguilla 
• Bahamas  
• Fiji  
• Guam  
• Palau  
• Panama  
• Samoa  
• Trinidad and Tobago  
• Turks and Caicos Islands 
• American Virgin Islands  
• Vanuatu  

This annually updated list is based on the EU list of non-cooperative countries and territories for tax purposes (the so-called "black list"). On 14 February 2023, the EU added four countries (British Virgin Islands, Costa Rica, Marshall Islands, Russia) to its "black list". These countries are expected to be included in the next update of the Tax Haven Defence Ordinance (Steueroasenabwehr-Verordnung), which would then be in the scope of the law as of 1 January 2024. 

Section 12 Tax Haven Defence Act (Steueroasenabwehrgesetz) provides for increased duties of cooperation for relevant business transactions with reference to non-cooperative jurisdictions. 

The following records must be established: 

• Presentation of the business relationships as well as underlying contracts and agreed contractual terms; 
• Listing of agreements with reference to intangible assets; 
• The functions performed and risks assumed by the parties involved in the business relationship, the material assets used; 
• The chosen business strategies as well as the market and competitive conditions that are relevant for taxation; 
• The natural persons who are directly or indirectly partners or shareholders of a company in the non-cooperative tax jurisdiction with which the taxpayer has a business relationship (exception for listed companies). 

Documentation under the Tax Haven Defence Act (Steueroasenabwehrgesetz) are to be prepared no later than one year after the end of the business year and transmitted without request to the tax authorities.

This obligation applies to all taxpayers that have business relationships or participation in or with reference to non-cooperative jurisdictions. 

The same penalties apply for the documentation requirements under the Tax Haven Defence Act (Steueroasenabwehrgesetz) as for the regular transfer pricing documentation obligations described under 1.4. 

In case of a violation of the record-keeping obligations pursuant to the Tax Haven Defence Act (Steueroasenabwehrgesetz), tax authorities may assume that taxable income in Germany from business transaction with reference to non-cooperative jurisdictions (i) has not been previously declared but actually exists; or (ii) that it has been previously declared but actually is higher than declared. The burden of proof is shifted to the taxpayer.