German Transfer Pricing Rules In Practice
Mondaq Business Briefing › Germany Law Articles in English (2007)
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German Transfer Pricing Rules In Practice
In recent years, the government and its Finance Ministry have tightened the legislation relating to transfer pricing, seeking not only to offset reductions in the tax rate but also to close the loopholes said to be eroding the German tax base. Historically, transfer pricing was an important issue, primarily with respect to domestic transactions, since German tax authorities focused on the relation of companies to their German resident shareholders rather than on cross-border issues.
Legislation and Administrative Guidelines Germany applies the "at arm's length" principle to transactions of related parties. For corporations, this principle is stipulated in Section 8, Paragraph 3, of the Corporation Income Tax Act (Körperschaftsteuergesetz) and states that a hidden distribution of profits cannot reduce the taxable income. The term "hidden distribution" is defined by extensive case law and the administrative regulations (Körperschaftsteuer-Richtlinien) as a decrease of assets or a prevented increase of assets of a corporation that is caused by the relation of the company to its shareholder and affects the corporation's income. A decrease or prevented increase of profits is based on the relationship of the shareholder to the corporation if a prudent and diligent managing director, under the same facts and circumstances, would not have acc...See the full content of this document
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