On 14 July 2021, the German Ministry of Finance (MoF) published a decree providing updated administrative principles on transfer Pricing.

The new decree replaces several decrees that were passed in the past at transfer prices, in particular the original decree of 1983 and the decree of 2011 on the application of inter-company loans as well as parts of the “administrative procedural principles” from 2005 insofar as they have not already been replaced by the updated “Administrative Principles 2020” published on December 2020.

The new decree contains some provisions on intra-group financing structures. Accordingly, unless the offshore finance company has the ability and authority to control the investment of the funds and bear the financial risk, the interest rate on a loan must be determined on the basis of a risk-free market rate of return. In such a situation, a German borrower may only deduct a risk-free market return as an arm’s length expense. The decree also stipulates that the remuneration of the financing company in such a situation is generally to be calculated according to the cost-plus method on the basis of the directly attributable operating costs. The decree expressly forbids the inclusion of refinancing costs in the cost base.

The new decree states that the OECD guidelines on transfer pricing methodologies should be followed and the method most appropriate for the underlying case should be used. If no comparable data from third parties are available, a hypothetical arm’s length test using commercially recognized valuation methods should be carried out.