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.

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