Transfer pricing
New administrative principles for transfer pricing published on 12 December 2024 – Clarification of the arm’s length principle by the tax authorities
Shortly before the end of the year, the Federal Ministry of Finance (BMF) published the revised ‘Administrative Principles for Transfer Pricing – Principles for the Adjustment of Income in Accordance with Section 1 of the German Foreign Tax Relations Act (AStG)’. These principles clarify the arm’s length principle for cross-border business relationships with related parties, in particular associated enterprises. In doing so, the tax authorities are essentially guided by the 2022 OECD Transfer Pricing Guidelines, which are attached to the publication. At the same time, the BMF is substantiating the OECD’s often vaguely formulated requirements. The new administrative principles will come into force from the 2024 assessment period and replace the version dated 6 June 2023.
In particular, the law has introduced changes to group financing, which have been fleshed out by the new administrative principles. For new financing or significant changes to existing financing, the new rules will already take effect in 2024.
Changes to group financing in the Growth Opportunities Act
The Growth Opportunities Act, which came into force in spring 2024, introduced new rules for cross-border financing relationships within multinational corporate groups. These relate in particular to the deductibility of interest paid to foreign group companies (Section 1 (3d) AStG, new version) and the classification of certain financing activities as regular, low-risk services. For the latter, the cost-plus method is to be applied, whereby only a small profit margin is permissible (Section 1 (3e) AStG).
Legal certainty through clarification by the tax authorities
The introduction of the legal reforms was met with criticism from companies – on the one hand because of deviations from the OECD guidelines, which entail risks of double taxation, and on the other hand because of numerous undefined legal terms that lead to interpretation difficulties. On 14 August 2024, the BMF presented a draft for the application of the new regulations. The final version of the administrative principles Transfer Pricing 2024 was published on 12 December 2024 and now contains detailed instructions for implementing the provisions in Section 1 (3d) and (3e) AStG.
Relief for companies
The new administrative instructions provide some relief for companies, as the tax authorities provide for a taxpayer-friendly interpretation in many cases of doubt:
- Ability to service debt: In addition to the debtor’s existing assets, follow-up financing may also be taken into account. The decisive factor is an overall view of the economic circumstances.
- Risky financing: Financing relationships with uncertainties, for example in the start-up sector, can nevertheless be recognised as at arm’s length.
- Use of the borrowed capital: This must be compatible with the company’s purpose. The generous interpretation includes the use for distributions or the provision of a liquidity reserve for acquisition financing.
- Burden of proof: For operating expenses to be recognised, the criteria of ‘ability to service debt’, ‘economic need’ and ‘use for the purpose of the business’ must be credibly demonstrated cumulatively. A preponderance of probability is sufficient. In the event of a violation, the deduction of operating expenses will only be refused for the portion that is not at arm’s length.
- Determining the interest rate: While the group rating is generally used, the BMF also allows simplifications or individual ratings under certain conditions.
- Temporal application: The new regulations do not yet apply in 2024 to financing relationships that were agreed under civil law before 1 January 2024 and have already been implemented, unless significant changes occur after 31 December 2023. The administrative principles also confirm that the new regulations will apply in full from the 2025 assessment period – including for financing relationships established before the law came into force. In this case, it should be sufficient to demonstrate compliance with the requirements for recognition as of 31 December 2024. For new financing or significant changes to existing financing, the new regulations will already take effect in 2024.
Despite the business-friendly interpretation, the new regulations represent a considerable burden for many companies. Particularly from 2025, when the regulations will also apply without restriction to existing financing, it is highly advisable to review and adjust financing structures.