• Service: Tax, Global Transfer Pricing Services
  • Type: Regulatory update
  • Date: 7/2/2014

Germany - Transfer pricing terms defined in BMF guidance 

July 2:  Germany’s Federal Ministry of Finance (BMF) provided definitions with respect to certain terms—transfer prices, the arm’s length principle, and business relationship—in guidance dated 4 June 2014.

Summary of definitions provided by the BMF

  • The intercompany prices agreed to for the exchange of goods or services are referred to as “transfer prices.” Unlike transactions involving unrelated third parties, for which there is no natural conflict of interest, the profits of companies that are members of the same corporate group may be shifted between the affiliated companies using either higher or lower transfer prices. Thus, the companies can benefit from differing tax rates on an international level.
  • In instances of foreign business relationships with a related party, transfer prices are only recognized for tax purposes if the prices correspond to what independent third parties would have agreed to in the same or in comparable circumstances—i.e., the “arm’s length principle.”
  • Notwithstanding other rules, in instances of a profit reduction, the taxpayer’s income must otherwise be assessed as if it had been generated under conditions as may have been agreed to by unrelated third parties.
  • As defined by law, the term “business relationship” includes (but is not limited to) business transactions that form part of an activity that would generate income derived from agricultural and forestry, from commercial business activities, from independent personal services, or from rental or usufructuary leasing activities if the business transaction with the foreign related party had occurred in Germany. In other words, first, assume that none of the transactions occurred abroad, so that the question becomes: Whether the activity would result in income derived from any of these activities if the business transaction had fully taken place in Germany. Second, assume that instead of involving a foreign related party, the parties to the transaction were domestic related parties. The definition also pertains to the application of the prior legal definition of “business relationship” as applicable until 31 December 2012.

Contact a tax professional with KPMG's Global Transfer Pricing Services.

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