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June 20, 2023

German Ministry of Finance issues updated Administrative Principles regarding Transfer Pricing

  • The German Ministry of Finance published, on 6 June 2023, updated Administrative Principles on Transfer Pricing clarifying the German transfer pricing rules.
  • The updated guidance replaces the previous version of the Administrative Principles on Transfer Pricing published on 30 September 2021 and is intended to align the administrative guidance to the current legislative transfer pricing framework in Germany.
  • This Alert summarizes the key aspects of the updated Administrative Principles on Transfer Pricing as well as relevant background on the recent developments with respect to transfer pricing.

Executive summary

On 6 June 2023, the German Federal Ministry of Finance (MoF) issued updated Administrative Principles Transfer Pricing (AP TP 2023). Administrative principles in Germany represent a third element (in addition to the tax law and order decree law) of German tax provisions. In contrast to tax law and executive orders, the administrative principles are not legally binding on either taxpayers or the tax courts, but are only binding on the tax administration that needs to apply them when assessing or auditing the taxpayer. As such, they serve as additional guidance for the interpretation and illustration of the tax law and executive order by the tax administration; accordingly, they are of significant practical importance for taxpayers.

The AP TP 2023 replace the previous version of the AP TP published on 30 September 2021 (publication in the Federal Tax Gazette)1 and are intended to align the AP TP to the current transfer pricing (TP) rules by providing the MoF viewpoint to the interpretation of the arm's-length principle in Germany.

Key changes include updated administrative guidance on the German cross-border transfer-of-function rules to align the existing Administrative Principles on Transfer of Business Functions as of 13 October 2010 with recent legal changes in the cross-border transfer-of-function rules in the German Foreign Tax Act and the corresponding updated Order Decree Law on Transfer of Business Functions (Funktionsverlagerungsverordnung - FVerlV).2 In particular, the AP TP 2023 clarify the definition of a "transfer of function" and the calculation of the transfer package by following the stricter legal rules compared to the previous law. Additionally, the MoF continues to follow a restrictive view on some aspects not regulated by law. Specifically, the new guidance does not include a de minimis rule and certain other aspects that were previously helpful in practice and, thus, further tightens the application of transfer-of-function rules for taxpayers.

With respect to intercompany financing transactions, the MoF aligns its interpretation on the examination of income allocation between entities involved in financing transactions with the Organisation of Economic Co-operation and Development (OECD) Guidelines and with recent German jurisprudence of the Federal Fiscal Court (BFH) on determining intercompany interest rates for intercompany loans. In particular, the MoF has changed its controversial view that interest expenses exceeding the risk-free market return are not deductible at the level of borrower group entities unless the financing company is "able and authorized" to control the financial investment and has the capacity to bear the corresponding risks. The MoF now clarifies that the interest rate should be determined based on the economic circumstances of the borrowers (not the lenders).

The provisions of the AP TP 2023 apply to all open tax cases effective immediately, with the exception of cross-border transfer of functions realized before 1 January 2022, for which the existing Administrative Principles on Transfer of Business Functions as of 13 October 2010 still apply. This Alert summarizes the key aspects of the AP TP 2023 and provides relevant background on the recent developments.

Detailed discussion

OECD Transfer Pricing Guidelines

The AP TP 2023 continue to refer to the OECD Transfer Pricing Guidelines (para. 2.1) as the key basis for the administrative guidance and now include, in German, the latest version published by the OECD in January 2022 as Appendix 1.

The AP TP 2023 continue to take the position that the ongoing discussion of whether Article 9 of the OECD Model Tax Convention needs to be interpreted statically (i.e., without taking into account current interpretations of Article 9 and the arm's-length principle) or dynamically (i.e., based on the most current interpretations as published by the OECD) is not relevant with respect to the arm's-length principle as such (para. 2.3). According to the view of German tax authorities, the arm's-length principle is based on economic principles that are independent of time and context. Thus, the AP TP 2023 assert that contrary to the global developments related to the ongoing OECD Base Erosion and Profit Shifting (BEPS) project regarding tax challenges arising from digitalization, the arm's-length principle provides enough flexibility to address current developments in the digital economy without implementing additional legislative measures. Taxpayers should be aware that this position is highly debated among German and international tax experts and that the BFH and tax courts in other jurisdictions have already taken a different position on this important question.

Guidance on dispute resolution for income and property taxes but not for Advance Pricing Agreements (APAs)

With respect to the avoidance and resolution of transfer pricing conflicts, the AP TP 2023 now refer to the new administrative guidance on dispute resolution for income and property taxes dated 27 August 2021.3 This new administrative guidance comments on dispute settlement procedures under double-tax treaties, the European Union (EU) Arbitration Convention and EU DTT Dispute Settlement Act and clarifies general procedural questions regarding their application. In light of increasing legal uncertainties in the application and interpretation of the arm's-length principle in Germany, this guidance is of high practical relevance for taxpayers. The AP TP 2023 no longer refer to the administrative guidance on APAs dated 5 October 2016 regarding the process for APAs, because the German legislature since introduced a specific legal norm for advanced bi- or multilateral rulings (Section 89a of the German General Tax Act) which was not reflected in the previous guidance. While the implementation of a specific norm for APAs has been welcome, significant practical and procedural questions and uncertainties remain that the MoF could address in further guidance.

Transfer of function rules

Germany adopted legal changes to the cross-border transfer-of-function rules in section 1 paragraph (3b) Foreign Tax Act (FTA) that came into force with effect as of 1 January 2022. These law changes required updating the Order Decree Law (FVerlV), which was published on 24 October 2022. An order decree law has the character of law in Germany and thus is legally binding for taxpayers, tax authorities as well as for courts. The objective of the new FVerlV was to amend the previous FVerlV to align with recent legal changes to enhance legal certainty and to clarify certain details of the previous FVerlV. However, the new FVerlV includes certain aspects that further tighten the transfer-of-function rules much beyond the recent legal changes of section 1 paragraph (3b) FTA and the previous FVerlV. Among others, the new Order Decree Law extends the definition of a "transfer of function" and includes changes for calculating the transfer package (e.g., consideration of tax effects and determination of comparable third-party discount rates). Also, while the existing FVerlV only required a taxpayer to provide prima facie evidence, the new Order Decree Law shifts the burden of proof to taxpayers under certain conditions. Whether or not these recent changes of the FVerlV — usually detrimental for the transferring entity — are in line with the law is subject to intense debate and will ultimately have to be decided by the courts. In the meantime, however, the MoF has now clarified in the AP TP 2023 that the tax authorities will follow the more rigid approach in the new FVerlV.

The new chapter in the AP TP 2023 is significantly shorter than the existing administrative guidance and the following aspects are noteworthy:

  • Functions that may be subject to a transfer also include activities to control risks and DEMPE (development, enhancement, maintenance, protection, exploitation) functions (para 3.89).
  • The MoF continues to apply a narrow interpretation of the term "function" that is product-related; e.g., a function may be the manufacturing of a certain product or product group, the distribution of a certain product, a certain product group or a certain business activity for a certain region (para 3.90).
  • The results of the function and risk analyses before and after the restructuring and the resulting changes are decisive of assessing a transfer of function (para 3.92).
  • The use of personnel within a multinational group does not, as such, constitute a transfer of function. However, a transfer of function may occur in cases of personnel secondment (e.g., if the seconded personnel take their previous area of responsibility from the seconding company with them and perform the same activity in the receiving company). This generally restricts the business activities of the seconding company and makes available for use or transfer its assets and advantages together with opportunities and risks. In such cases, the transfer-of-function rules apply (para 3.95).
  • If, within five years after the acquiring company assumes a function, no corresponding restriction can be ascertained at the transferring company, there is no transfer of function, but rather a duplication of a function. A duplication of function occurs, for example, if the previous manufacturing and sales activities of the domestic company continue unchanged despite the start of manufacturing activities abroad. A transfer of function, on the other hand, occurs if the sales function is newly established abroad and the sales function of the transferring company is restricted as a result (indicator: revenue), e.g., because the acquiring company supplies previous customers of the transferring company. The question of whether a function is discontinued or restricted relates to the revenue generated by the specific function and whether one function is substituted for another. There is no transfer of function if the restriction is not directly economically related to the duplication of the function (e.g., if the restriction is due to force majeure (such as a fire in a production facility)) (para 3.99).
  • For a transfer package, it is generally not possible to determine comparable arm's-length values, either with full or limited comparability. Therefore, if a transfer of function occurs, the hypothetical arm's-length comparison will have to be applied as a rule. In these cases, for determining the transfer price, the expected future financial benefit from the transfer package is decisive. This value needs to be determined by a business valuation that is based on a net present value-oriented method recognized as a valuation standard and also customarily applied in ordinary business transactions for non-tax purposes (para 3.101).
  • The appropriate capitalization rate represents the return of an alternative investment equivalent to the valuation object in terms of maturity, risk and taxation. Depending on the valuation method applied, the return on equity or the return on equity and debt must be taken into account. The risk-premium method is used to determine the capitalization rate. Under this method, the capitalization rate is divided into its components of basic (risk-free) interest rate and risk premium. The risk premium is the product of the market risk premium and the beta factor. For the period of a perpetual annuity, a growth discount must be considered in the capitalization rate (para 3.106).
  • If a function is wound/stripped down, the contractual relationships of the routine functions remaining at the restructured company are usually renegotiated. The underlying contracts often include termination clauses with or without entitlement to compensation in the event of termination. These provisions are to be examined from an arm's-length perspective and may give rise to specific compensation (para 3.107).
  • In cases where the parties have agreed to an arm's-length termination clause, a valuation of the routine function must be based on expected values in particular scenarios. This takes into account both the financial surpluses if (i) the function continues and (ii) the routine contract terminates (e.g., closure costs or compensation payments), based on each scenario's respective likelihood of occurrence.
  • Tax effects, i.e., tax gross-up from the transferor perspective (para 3.114) and tax amortization benefit from the transferee perspective (para 3.117) are to be considered when determining the value of the transfer package.

In addition, the MoF provides guidance for situations in which the bargaining range is negative (i.e., the minimum price from the transferor perspective exceeds the maximum price that a transferee would be willing to pay). According to the MoF these situations may be triggered by incorrect assumptions in the valuation model. In addition, one should consider whether the reason for the negative bargaining range may be an additional business relationship (para 3.17 AP TP 2023). If this is not the case, the negative difference must be allocated between the parties involved in the transaction. The legal grounds for such an allocation approach are highly doubtful. A transaction in which the buyer is prepared to pay less than the seller demands likely would not take place between unrelated third parties. This transaction would probably only take place if it were mandated in the interest of a group of companies as a whole. In that case, an additional business relationship consisting of "mandating of the execution of this transaction" might potentially be assumed. However, allocating the difference between the minimum and maximum price and thus a payment by the buyer exceeding the maximum price does not appear to be compatible with the arm's-length principle exercised by two ordinary and conscientious business managers. There is a reasonable risk that such an allocation would lead to double taxation because it is likely not accepted by the tax authority in the other country involved in the shift of functions.

Although the updated guidance is primarily based on existing guidance, certain aspects that are considered of practical relevance are no longer addressed. Specifically, deleted from the updated guidance is a clarification that transactions that would not be regarded by unrelated third parties as a transfer of function are not to be treated in accordance with the transfer of function principles (e.g., transfer of a single customer order/contract). In this context, the updated guidance no longer includes a "de minimis" rule as a threshold for a transfer of function (decrease in revenue less than EUR 1 million at the level of the transferring entity in the case of a duplication of functions). The same is true for the guidance on transactions that formally meet the criteria for a transfer of function but, in accordance with the arm's-length principle, are actually carried out in such a way that they are not to be considered a transfer of function (e.g., central, optimized control of production and the associated allocation of incoming orders). Furthermore, the updated guidance does not include the very helpful practical guidance providing that the timely termination of contracts in line with notice periods or the expiration of a contractual relationship do not constitute a transfer of function. Lastly, the previous guidance contained several examples of different types of restructurings (e.g., transfer of manufacturing function, transfer of distribution function, down-stripping from distributor to commissionaire/agent, etc.) that provided important practical considerations. The MoF abstained from including the examples in the updated guidance.

Price adjustment clause

An arm's-length individual-price-adjustment clause agreed to in a written contract might not allow German tax authorities to correct the transfer price once within 7 years (10 years based on past legislation) after the transfer took place if there is a significant difference between the forecast data used to determine the exit charge compared to the actual result (i.e., if the transfer price determined using the actual outcomes deviates by more than 20% compared to the outcome based on the financial projections). Notably, this rule applies only to the disadvantage of the German taxpayer but not to its advantage. The AP TP 2023 now confirm that in cases where an "appropriate" price adjustment clause has been contractually agreed, an income adjustment by German tax authorities is excluded (para 3.136). The AP TP 2023 still do not specify what criteria an "appropriate" price adjustment clause must fulfill and whether these are different from price adjustment clauses that are in line with the arm's-length principle.

Financing transactions

The AP TP 2023 no longer include the controversial MoF viewpoint that interest expenses exceeding the risk-free market return are not deductible at the level of borrower group entities unless the financing company is "able and authorized" to control the financial investment and bear the corresponding risks. The remuneration of a lender without either control functions or capacity to bear risks should still equal a risk-free rate on the capital employed. However, the adjustment of excess income should occur between the lender and the company with control functions and capacity to bear risks. The AP TP 2023 are now aligned with the OECD Guidelines and with recent German jurisprudence in which the BFH contradicted the position of the MoF in a ruling published on 21 October 2021 (BFH, ruling dated 18 May 2021, I R 4/17). According to the ruling, the interest rate should be based on the economic circumstances of the borrowers (not the lenders). However, with increasing economic importance of borrowers, the impact of their economic circumstances on the interest rate may be influenced by the group's economic circumstances due to implicit group support.

The AP TP 2023 clarify the collateralization of loans due to a recent German court case (BFH date 13. January 2022, I R 15/21) by stating that a non-collateralization of loans also can be at arm's length. Whether a lack of loan collateralization is in line with the arm's-length principle depends on whether a third party — taking into account potential risk compensations — would have granted the loan under the same conditions (para 3.128). Relevant indicators of an arm's-length behavior that need to be analyzed in totality include the behavior of the group toward third-party lenders (e.g., if the group typically provides collateral to third-party lenders) and economic benefits of collateralization and options realistically available (ORAs) to the parties (e.g., if the borrower would have been able to offer collateral to secure better credit terms). In practice, this will require an economic analysis regarding whether non-collateralized lending is economically beneficial and feasible.

According to the AP TP 2023, a specific informational advantage (Wissensvorsprung) resulting from the possibilities of influence and control under company law would be taken into account in setting the price between unrelated third parties if it was based on a contractually agreed position. The extent and impact of the informational advantage due to company affiliations has to be considered appropriately for the respective case at hand. There are no further explanations for how such informational advantages should influence intercompany interest rates. However, potentially, it is intended to reduce the probative value of market interest rates based on the assumption that third-party lenders are at an informational disadvantage vis-à-vis related-party lenders. Such a view ignores that third-party lenders have ways and means to reduce any informational disadvantages by reporting requirements, monitoring activities, covenants, etc.

The AP TP 2023 maintain the current viewpoint of German tax authorities that the allocation of synergies across cash pool participants cannot be performed based on a causation principle but should be assessed on a case-by-case basis considering the acceptance of any structure in foreign jurisdictions (para 3.132). However, a new reference to the OECD Guidelines (chapter X, C. 2.3.2) regarding the remuneration of cash pool participants is now expressly included. In principle, the AP TP 2023 take the same position with respect to cash pools as the OECD Guidelines — in particular, that a cash pool leader generally should earn only a routine cost-plus profit. However, in contrast to the OECD Guidelines, the wording of the AP TP 2023 does not leave any room for a cash pool leader earning debit-credit interest rate spreads.

It is also noteworthy that the MoF holds to its position that if cash pool members maintain debit and credit positions that, rather than functioning as part of a short-term liquidity arrangement, become more long term, a cash pool does not economically exist. Instead, the underlying arrangement shall be considered to be a long-term loan arrangement and has to be treated accordingly (para 3.133).


The provisions of the AP TP 2023 apply to all open tax cases effective immediately, with the exception of cross-border transfer of functions realized before 1 January 2022, for which the existing Administrative Principles on Transfer of Business Functions as of 13 October 2010 still apply. Against this background, taxpayers should review the changes, including the interpretation of the arm's-length principle by the MoF and determine any implications on their transfer pricing policy and documentation strategy.


For additional information with respect to this Alert, please contact the following:

Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft

Ernst & Young LLP (United States), EMEIA Transfer Pricing Desk, New York

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor



1 See EY Global Tax Alert, German Ministry of Finance issues new Administrative Principles regarding transfer pricing, dated 23 July 2021.

2 See EY Global Tax Alert, German Government issues draft order decree law on cross-border transfer of function rules, dated 29 September 2022.

3 See EY Global Tax Alert, German Ministry of Finance issues guidance on dispute resolutions for income and property taxes, dated 8 September 2021.


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