Germany: Provisions amending arm’s length principle, transfer pricing

Legislation includes extensive revisions regarding the provisions governing transfer pricing

Legislation includes revisions regarding the provisions governing transfer pricing

Legislation (known in English as the “Act to Modernise the Relief from Withholding Tax and the Certification of Capital Gains Tax” [AbzStEntModG]) was promulgated in the federal gazette (BGBl. I 2021, p. 1259) on 8 June 2021.

The key points of the legislation include:

  • Revision of the anti-treaty shopping rule
  • Amendments to the provisions governing the relief procedure for foreign taxpayers from withholding tax
  • Amendments to the provisions on the arm's length principle under the Foreign Tax Act

Transfer pricing measures

In general, the legislation includes extensive revisions regarding the provisions governing transfer pricing.

  • The wording of the provisions on the adjustment of income (§ 1 Foreign Tax Act) is revised extensively and, thereby, is to be closer aligned to the OECD Transfer Pricing Guidelines. The existing hierarchy of methods with the primacy of the standard methods (comparable uncontrolled price method, resale method, and cost plus method) is dropped. Instead, the “most suitable method” is to be applied.
  • To determine the arm’s length price, the actual price-impacting circumstances underlying a transaction first must be examined and determined by way of a function and risk analysis as well as a comparability analysis. The principle of substance-over-form must come to the fore.
  • There are new provisions on transfer pricing in the event of the transfer or licensing of intangible assets. The concept of an intangible asset is, for the first time, legally defined and closely aligned to the OECD Transfer Pricing Guidelines. The proprietor or owner of the intangible asset must compensate related persons adequately if and in so far as they perform services or exercise functions in relation to the intangible asset (in connection with the development or creation, the enhancement, the maintenance, the protection, or any kind of exploitation of the intangible asset; the “DEMPE” concept—Development, Enhancement, Maintenance, Protection, and Exploitation).
  • Already existing provisions regarding “price-adjustment clauses” for situations when substantial intangible assets constitute the subject matter of a business relationship are set out separately and extended in a new § 1a Foreign Tax Act. The period for potential price adjustments, among others, is reduced to seven years (from 10 years) following the conclusion of a transaction.

The provisions governing the arm's length principle are applicable to income and corporation tax for tax assessment period 2022.


For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in Germany:

Michael Freudenberg | +49 211 475-7584 | mfreudenberg@kpmg.com

 

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