Significant tightening of German transfer pricing documentation requirements
Andreas Lang
by Andreas Lang
Transfer prices and accompanying documentation of the same are regularly and increasingly a component of tax audits in Germany. Based on recent changes to the respective German law, the available time for submitting transfer pricing documentation reports will be substantially reduced in future, and the scope of transactions to be documented will increase. This will require companies to rapidly draft documentation once a triggering event, such as a request from a tax audit, is received. Overall this marks a substantial change which should be adequately addressed.
Background
Generally, a transfer price is the price at which one associated company, or a legally dependent unit of the same company, charges another unit for a product, an intermediate product, or a service. In cross-border situations, transfer prices must be set as if they were agreed upon by independent third parties under similar or comparable conditions (the so-called arm's length principle).
The cross-border transactions relevant in the field of transfer pricing include, for example:
Sales of goods/merchandise;
Contract manufacturing;
Licences;
Loans;
Services (e.g. management or administrative services);
Employee secondments; and
Restructurings.
In the realm of transfer pricing, it is essential to set prices at arm's length. Moreover, documentation of transfer prices is an exceptionally crucial aspect, as it serves as evidence of compliance with the arm's length principle during a tax audit, and some countries also mandate maintaining annually updated transfer pricing documentation.
German transfer pricing documentation regulations
In general, there is currently no legal requirement in Germany to prepare annually updated documentation of the arm’s length prices of transactions between related parties (= transfer pricing documentation).
Transfer pricing documentation is only required by the German tax authorities upon request, typically during a tax audit. In this regard, the taxpayer has a legal obligation of cooperation. Once requested by the German tax authorities, the deadline for providing transfer pricing documentation is only 60 days (30 days for exceptional business transactions).
Significant tightening of German transfer pricing documentations regulations
With the implementation of the DAC-7 Directive into German tax law, and the corresponding changes to § 90 of the German Fiscal Code, the deadline for submitting German transfer pricing documentation will be significantly reduced to only 30 days from the date of an audit order or any time a separate request is made, effective from 2025 for all transactions. Furthermore, the documentation must now be submitted in full.
This marks a significant change from the previous requirement where the taxpayer was obligated to submit German transfer pricing documentation only upon request, usually during a tax audit.
In the future, transfer pricing documentation may explicitly be requested at any time, and must be submitted during an audit without a separate request, starting from the notice or notification of the audit order, with a deadline now reduced to just 30 days – halving the previous 60-day submission period. Another tightening is that the documentation now must be submitted in full, including transactions with low volumes and minor changes considered as extraordinary transactions.
The new regulations regarding the submission of German transfer pricing documentation reports apply to taxes levied after 31 December 2024, and to taxes levied before this date, if an audit is ordered after 31 December 2024.
Given the tightening of deadlines as well as the scope of information, firms are strongly advised to place German transfer pricing documentation on their 2024 agendas to be adequately prepared. The new, stricter deadline makes it practically impossible to start preparing German transfer pricing documentation only after an audit order; thus, being prepared is essential to minimise risk and avoid potential penalties.
Schlecht und Partner bundles different specialisations and forms a powerful team in complex consulting assignments. They advise entrepreneurs, companies and individuals in all business and tax matters and conduct audits for medium-sized companies. Based on their broad technical and industry expertise, they have a vast experience in SME consulting.
XLNC member firm Schlecht und PartnerStuttgart, GermanyT: +49 711 40 05 40 30Auditing & Accounting, Tax
Andreas is an International Tax Manager at Schlecht & Partner in Stuttgart, Germany. Specialising in transfer pricing and international tax advisory, he worked at a Big4 firm in Germany and Canada as well as for multinational automotive firms in international tax. Contact Andreas.
