German Administrative Principles transfer pricing 2024

Amendments to Intra-Group Financing Relationships under Sec. 1 (3d) External Tax Relations Act (AStG)

The final version of the Administrative Principles transfer pricing 2024 (VWG VP 2024) introduce various clarifications and innovations compared to the original drafts – particularly with regard to examination criteria and evidence within the framework of Sec. 1 (3d) External Tax Relations Act (AStG):

• Economic necessity of financing: In accordance with legislative requirements, intra-group financing must serve operational or business continuity purposes and be consistent with the corporate objective (business-purpose test). According to the BMF, this also includes financing of profit distributions, provided these occur within the scope of the entity’s customary distribution policy.
• Demonstration of debt service capacity: It must be assessed whether sufficient assets or cash flows are reasonably expected from the outset to satisfy the lender’s claims. The BMF further notes that material indicators for substantiating debt service capacity include the existence of a fixed repayment date, contractual obligations concerning interest payments, and enforceability of principal and interest. In the case of short-term instruments such as cash pooling loans, debt service capacity may generally be assumed. Additionally, the potential need for refinancing may also be taken into account.
• Extent of non-recognition of financing: Where only partial evidence is available to substantiate a financing transaction, the BMF confirms that a correction shall apply solely to the non-arm’s-length portion of the transaction. The non-recognition should thus be limited to the unsupported element, rather than the entire financing arrangement.
• Determination of the arm’s-length interest rate: The VWG VP 2024 expand upon the previous guidance on interest rate determination. Among other things, the letter outlines when a group rating may be appropriate, and when a stand-alone or adjusted rating is to be applied. Moreover, the BMF confirms that a rating issued by the Deutsche Bundesbank is also accepted as a measure of creditworthiness. While it remains uncertain whether the guidance applies to both inbound and outbound financing arrangements, the BMF states that the arm’s-length principle—and by extension, these financing rules—should be applied consistently in both scenarios.

The revised BMF letter thus provides greater clarity in the practical application of the abstract regulations of Sec. 1 (3d) External Tax Relations Act (AStG). For companies planning intercompany cross-border financing, it is advisable to incorporate these guidelines early into tax planning to minimize potential risks. However, it remains unclear to what extent the regulations, primarily tailored to cross-border situations, are also binding for purely domestic financing relationships.

Changes to intercompany cross-border financing relationships under Sec. 1 (3e) External Tax Relations Act (AStG)

In addition to the explanations on the new regulations in Sec. 1 (3d) External Tax Act (AStG), the BMF also comments on the new regulation in Sec.1 (3e) International Transactions Tax Act (AStG). This concerns the arm’s-length pricing of intra-group services related to financing relationships. These include the mediation and forwarding of financing relationships and treasury services, such as liquidity management, financial risk management, currency risk management, or the activities of a financing company.

According to the statute, these services are presumed to be low-function and low-risk in nature and are to be remunerated accordingly. However, this presumption may be rebutted through a functional and risk analysis that demonstrates a different remuneration approach is appropriate.

In this context, the BMF particularly emphasizes the case where a financing company borrows loans from external lenders and passes them on internally in the form of loans. Beyond the mere pricing of the loan, the BMF believes it should also be examined whether the financing company actually controls the essential risks associated with the intercompany loan issuance or whether this is done by another (German) group company. If the latter is the case, the BMF believes the financing company is only entitled to a risk-free return (remuneration for low-function and low-risk service). The additional results from these financing transactions should instead be remunerated as compensation for risk control and thus risk-bearing by the other (German) company to that other company. The BMF thus identifies an additional business relationship that needs to be remunerated between the financing company and the other (German) company.

A comprehensive analysis of the BMF's explanations on cross-border financing relationships can be found here.

Implementation of Amount B (Pillar 1)

For the first time, the VWG VP 2024 also address the provisions concerning Amount B (Pillar 1) of the OECD Transfer Pricing Guidelines. These provisions are designed to simplify the determination of an arm’s-length return for certain baseline marketing and distribution activities.

In Chapter G "Goods Deliveries and Services", the BMF refers to the final OECD report and confirms that transfer prices for transactions falling within the scope of Amount B (Pillar 1) may be determined using the simplified and standardised approach, provided that the counterparty is located in a so-called covered jurisdiction as defined in Annex 5 of the VWG VP 2024.

Further conditions include the existence of a Double Taxation Agreement with the jurisdiction in question, which must not be listed as a non-cooperative tax jurisdiction within the meaning of the Combating Tax Havens Act (StAbwG).

Note: The revised VWG VP 2024 are to be applied for the first time in the 2024 assessment period — with the exception of the provisions on Amount B (Pillar 1). The rules on Amount B (Pillar 1) will take effect as from the 2025 assessment period. For periods up to and including 2023, the VWG VP 2023 dated 6. June 2023 continue to apply.