Germany – Transfer Pricing (2025)

Legal framework and scope

Germany’s transfer pricing framework is anchored primarily in the External Tax Relations Act (Außensteuergesetz) and in administrative practice issued by the Federal Ministry of Finance. Domestic law explicitly refers to the arm’s length principle through Section 1 of the External Tax Relations Act, with Section 1(3) addressing the application of transfer pricing methods. The External Tax Relations Act is complemented by the Circular on Transfer Pricing (Verwaltungsgrundsätze Verrechnungspreise) dated 14 July 2021, which incorporates the OECD Transfer Pricing Guidelines as an annex and makes numerous cross-references to the Guidelines. Other relevant provisions reside in the Fiscal Code (Abgabenordnung), notably Sections 90(3), 138a, 162(3) and 162(4) relating to documentation, estimation and compliance incentives, as well as Section 89a regarding advanced mutual agreement procedures and Section 175a regarding secondary adjustments.

Arm’s Length Principle and the role of the OECD Guidelines

The External Tax Relations Act establishes the application of the arm’s length principle and enables the use of the OECD Transfer Pricing Guidelines under German law. The 14 July 2021 Circular not only refers to the OECD Guidelines but attaches them as an annex; consequently, German administrative practice follows the OECD Guidelines for method selection, comparability analysis, adjustments and statistical measures. The legal references include Section 1(1) to (5) of the External Tax Relations Act and multiple paragraphs of the 2021 Circular (e.g., paras. 3.9, 3.18, 3.29, 3.42, 3.55-3.62, 3.74, 3.81, 3.88).

Definition of related parties

Section 1(2) of the External Tax Relations Act contains the domestic definition of related parties. According to this provision, a party is related to the taxpayer if: (1) one party holds directly or indirectly a substantial stake — such as at least one quarter (25%) in subscribed capital, membership rights, participation rights, voting rights or company assets — or is entitled to at least one quarter of profits or liquidation proceeds; (2) one party is able to exercise controlling influence directly or indirectly over the other; (3) a third party holds a substantial stake in both parties, is entitled to at least one quarter of profits or liquidation proceeds of both, or can exercise controlling influence over both; or (4) when negotiating terms of business relations one party can exert influence on the other that is not based on those business relations, or one has an own interest in the realization of the other’s income. The wording clarifies that the third-party scenarios (sentence 1 no 3 (a) to (c)) apply also if each relationship fulfills the specified criteria.

Methods and selection criteria

German law recognises the standard transfer pricing methods set out by the OECD. Section 1(3) of the External Tax Relations Act accepts methods including the Comparable Uncontrolled Price (CUP), Resale Price, Cost Plus, Transactional Net Margin Method (TNMM) and Profit Split, and the 14 July 2021 Circular (para. 3.9) explicitly refers to the OECD methods in administrative practice. The selection criterion for the applicable method is the most appropriate method, in line with Section 1(3) sentence five External Tax Relations Act and OECD guidance. The law requires comparability adjustments where necessary to improve comparability (Section 1(3) sentence six External Tax Relations Act). Germany also recognises the use of statistical measures and arm’s length ranges, specifically the interquartile method under Section 1(3a) External Tax Relations Act, which is further explained in the Circular referring to paras. 3.55–3.62 of the OECD Guidelines.

Comparability and ranges

Germany follows the comparability analysis described in Chapter III of the OECD Guidelines; the 2021 Circular at para. 3.18 makes this link explicit. There is no preference for domestic comparables over foreign comparables, and the tax administration does not employ secret comparables. The domestic framework permits and regulates the use of arm’s length ranges and statistical measures, notably the interquartile method provided in Section 1(3a) External Tax Relations Act and elaborated in the Circular (para. 3.29 and paras. 3.55–3.62). Comparability adjustments are required when needed (Section 1(3) sentence six). Administrative practice also contemplates year-end adjustments in cases where profit level indicators fall outside the comparables’ range (Circular paras. 3.42 et seq.).

Documentation and reporting

Germany requires taxpayers to prepare transfer pricing documentation, including the Master File, Local File and Country-by-Country Report (CbCR) consistent with Annexes I–III to Chapter V of the OECD Guidelines. The legal basis includes Sections 90(3) and 138a of the Fiscal Code, the Ordinance on the Documentation of Profit Allocations (Gewinnabgrenzungsaufzeichnungs-Verordnung) and the Circular on Administrative Principles of 3 December 2020, as well as Circulars on CbCR dated 11 July 2017 and 27 September 2019. The Master File obligation is subject to a threshold referenced in the profile as returns amounting to EUR 100 million. Master and Local Files must be submitted upon request for a field audit within 60 days. The documentation for extraordinary transactions must be prepared within six months after the fiscal year and submitted within 30 days upon request, in accordance with Section 3 of the Ordinance on the Documentation of Profit Allocations. CbCRs must be submitted within one year after the end of the fiscal year and may be accepted in English. All documentation must be provided in German or, if justified, in another language; in the latter case a German translation may be required upon request or for domestic court proceedings.

Safe harbours and simplification measures

There are no general statutory safe harbours in Germany for specific industries, types of taxpayers or transactions. However, the administrative practice accepts a simplification for low value-adding intra-group services whereby the cost-plus method with a 5% mark-up is accepted, as set out in para. 3.74 of the Circular of 14 July 2021. The Ordinance on the Documentation of Profit Allocations provides an exemption for small entities (section 6) which relieves them from preparing and submitting full transfer pricing documentation while requiring them to present underlying business papers on request.

APAs and MAP; procedures and timelines

Germany operates an APA programme and advanced mutual agreement procedures. Section 89a of the Fiscal Code and the Circular on APAs dated 5 October 2006 govern APAs. APAs typically have a duration of five years and rollback is allowed. The Advanced Mutual Agreement Programme under Section 89a also permits rollbacks in connection with MAPs; the covered period should not exceed five consecutive years and fees may apply. Guidance on MAP and arbitration procedures is set out in the Circular of 27 August 2021. Germany also engages in coordinated external tax audits with other tax administrations as described in the Circular of 6 January 2017.

Penalties and other considerations

If transfer pricing documentation is not provided or is insufficient, German tax authorities may estimate the respective income pursuant to Section 162(3) of the Fiscal Code and determine surcharges under Section 162(4). Secondary adjustments are possible under general tax legislation, notably Section 175a of the Fiscal Code, and commonly arise after adjustments resolved via MAP. The Circular allows and, where applicable, requires year-end adjustments if profit level indicators fall outside the comparables’ range (paras. 3.42 et seq.). Recharacterisation of transactions remains a possibility under domestic law and administrative practice.

Attribution of profits to permanent establishments (PEs)

Germany applies the Authorised OECD Approaches (AOA) for PE profit allocation in specified circumstances. Section 1(5) of the External Tax Relations Act and the Ordinance on the Application of the Arm’s Length Principle to Permanent Establishments (Betriebsstättengewinnaufteilungsverordnung) provide the legal basis, and the Circular dated 22 December 2016 sets out administrative approaches. The AOA is applied in eight bilateral treaties: Ireland, Japan, Liechtenstein, Luxembourg, the Netherlands, Norway, the United Kingdom and the United States. Generally, the AOA is applied with OECD countries; where older treaties do not contain the updated Article 7 (OECD MTC 2010 and later), interpretation in light of the AOA report is applied for OECD-country relations except for intellectual property transactions, where the AOA applies only if the treaty contains Article 7 in the 2010 or later version. For PEs in non-OECD countries where the relevant treaty lacks the new Article 7, the AOA is not applied.

Brief conclusion

Germany’s transfer pricing regime is firmly based on the External Tax Relations Act and administrative guidance that explicitly incorporates the OECD Transfer Pricing Guidelines. The jurisdiction applies the most appropriate method standard, recognises the principal OECD methods, requires comparability adjustments when necessary, allows statistical ranges (interquartile), permits year-end adjustments, and operates an APA and MAP framework with rollback possibilities. Documentation requirements are comprehensive with specific thresholds, timelines and language rules, and enforcement powers include income estimation and surcharges. By instruction, this profile omits specific discussion of commodities and intangibles.

References

For further information and access to the OECD country transfer pricing profiles: https://www.oecd.org/en/topics/sub-issues/transfer-pricing/transfer-pricing-country-profiles.html