Enactment of legislation regarding cross-border profit allocation was published in the Germany federal law gazette on 29 June 2013. Changes with regard to transfer pricing with the transposition into German tax law of article 7 of the OECD Model Tax Convention and the related commentary has been incorporates in this legislation. This Article relates to the approach in determining the business profits arising in a contracting state.
The change explains the rules for cross-border profit allocation independently of the various investment options available like corporation, partnership, and permanent establishment. As per the legislation the cross-border profit allocation between an enterprise and its foreign permanent establishment and between domestic permanent establishments of a foreign enterprise, is treated just as it would between two independent enterprises. The principle of arm’s length price is to be enforced on allocation of profit between an enterprise and its permanent establishment, under the authorized OECD approach. The details of the attribution of profits to permanent establishments were covered in reports issued by the OECD and referred to in the commentary to the OECD Model Tax Convention.
The new provisions regarding profit allocation and profit distribution are effective in Germany for the fiscal years beginning after 31 December 2012.
