Germany

Transfer Pricing compliance overview of Germany

Executive Summary

General Requirements

• The arm’s length principle is codified in Section 1 of the Foreign Tax Act (AStG) for all cross-border business relationships with related parties.
• Related parties are defined as entities with a minimum direct or indirect shareholding of 25%, or those possessing dominant influence over the taxpayer.
• Documentation obligations apply specifically to cross-border transactions, while domestic related-party dealings are subject to general cooperation duties and constructive dividend rules.
• New legislation effective January 1, 2024, introduces strict requirements for intra-group financing, requiring proof of debt sustainability and economic necessity for interest deductibility.

Documentation Requirements

• Germany utilizes a three-tiered documentation framework consisting of a Master File, a Local File, and a Country-by-Country (CbC) Report.
• Effective for tax periods starting after December 31, 2024, taxpayers must also maintain a Transaction Matrix providing a detailed overview of all cross-border business transactions.
• Extraordinary business transactions, such as business restructurings or the transfer of intangible assets, must be documented within six months after the end of the fiscal year in which they occurred.
• Master Files and Transaction Matrices must be proactively submitted within 30 days of receiving a tax audit announcement, while Local Files are typically submitted within 30 days upon request.

Results of Non-Compliance

• Failure to provide usable transfer pricing records triggers a rebuttable presumption that the taxpayer’s income is higher than declared, allowing the tax office to estimate adjustments.
• Non-compliance results in a surcharge ranging from 5% to 10% of the income adjustment, with a minimum mandatory penalty of EUR 5,000.
• Late submission of documentation is subject to a surcharge of at least EUR 100 per day of delay, reaching a maximum of EUR 1 million.
• Failure to comply with formal information requests during a tax audit can lead to separate delay penalties of up to EUR 250,000.

Country Specific Information

• For transfers of intangible property where no reliable comparables exist, taxpayers must apply a hypothetical arm’s length test based on the average value of a “consensus range” between the seller’s minimum and buyer’s maximum price.
• German law incorporates the Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) concept for the allocation of income from intangible assets.
• Cross-border transfer of functions is strictly regulated, requiring the valuation of a “transfer package” that considers the impact of the entire business function being relocated.
• Specific Public Country-by-Country Reporting (PCbCR) legislation applies to financial years beginning after June 22, 2024, for groups with consolidated revenues exceeding EUR 750 million.

Compliance Table

Document	Deadline	Language	Thresholds, Scope & Penalties
Local File	Within 30 days upon request (usually during an audit).	German; English may be accepted upon formal application.	Mandatory if cross-border goods remuneration > EUR 6m OR other services > EUR 600k (combined for all German group entities). Penalty: 5-10% of adjustment (min. EUR 5,000).
Master File	Within 30 days of tax audit announcement or request.	German; English often accepted in practice.	Mandatory for German entities with revenue $\ge$ EUR 100m in the preceding FY. Penalty: Up to EUR 1 million for late filing.
Transaction Matrix	Within 30 days of tax audit announcement (effective 2025).	German.	Applies to all taxpayers exceeding Local File thresholds. Detailed overview of intercompany flows. Penalty: EUR 5,000 minimum for non-submission.
CbC Notification	Included in the annual tax return.	German.	Mandatory for all constituent entities of groups with consolidated revenue $\ge$ EUR 750m. Penalty: General tax return non-compliance fines.
CbC Report	Within 12 months after the end of the reporting fiscal year.	English or German.	Mandatory for UPEs or designated surrogate entities with group revenue $\ge$ EUR 750m. Penalty: Up to EUR 10,000.
Extraordinary Records	Preparation within 6 months post-FY; submission 30 days from audit order.	German.	Applies to restructurings and material long-term contracts regardless of entity size. Penalty: Shift in burden of proof and 5-10% surcharge on adjustments.

Disclaimer: This information is obtained from secondary sources and is included for informative purposes. It should be confirmed by a local advisor.