German legislation stipulates that arm’s length transactions between a German party and a foreign affiliated party must be substantiated thoroughly. This implies that records must be kept which define the nature and substance of the business relationships.
The principles on which pricing and other mutual agreements are based must also be recorded. These principles must be at arm’s length, i.e., the prices should roughly equal the prices charged between independent third parties. A guideline is in place which defines precisely which documents have to be kept.
Moreover, the Germany Ministry of Finance, the ‘Ministerium der Finanzen’, recently issued several guidelines that define the requirements to be met for mutual supplies and services between persons, legal entities (BVs, GmbHs, etc) and permanent establishments. These guidelines also implement sanctions for non-compliance. The records must be submitted within 60 days at the tax authorities’ first request to that effect. If this is not possible, the tax authorities will increase the taxable profit, i.e., the tax base. Also an additional increase of 5% to 10% may be applied on top of the increase in the taxable profit. If the taxable profit is not increased, a penalty of EUR 5,000 minimum will be payable. These sanctions were implemented as early as in 2004. So please be aware that it is very important to adequately substantiate arm’s length transactions between affiliated parties.
Effective january 2008
These guidelines will be enacted effective 1 January 2008. The statutory regulation on Transfer Pricing will also be extended in 2008. The Bill to that effect stipulates that detailed statutory provisions will be implemented, including provisions that define the permitted transfer pricing methods.
Given the Transfer Pricing issue described above, we recommend consulting Deloitte Belastingadviseurs before concluding transactions between a party in Germany and an affiliated party outside Germany.