On 6 June 2023, the German Federal Ministry of Finance (BMF) has published updated transfer pricing administrative guidelines. The guidelines focus on two main areas:
- The application of the arm’s length principle in accordance with the OECD Transfer Pricing Guidelines and the transfer of functions. The updated guidelines provide general explanations regarding the principles of income correction, the competitive relationship with other correction regulations, and the definitions of related persons and business relationships. Additionally, they offer new explanations on the revised business function relocation ordinance (Funktionsverlagerungsverordnung).
- Regarding financing relationships, the updated guidelines incorporate the case law of the German Federal Tax Court (BFH) on the determination of arm’s length loan interest for group loans. The judgments (I R 4/17 of 18 May 2021, and I R 15/21 of 13 January 2022) establish that additional transactions may exist between the financing company and the company exercising control over the functions or risks associated with granting the loan, if there is a divergence between loan granting and actual control. The guidelines also clarify that both collateralized and non-collateralized loans can be considered arm’s length. The determination of arm’s length in the absence of collateral depends on whether a third party would have granted the loan under similar conditions, considering potential risk compensation.
The updated guidelines apply retroactively to all open cases. However, the provisions regarding the relocation of business functions only apply to relocations occurring after 31 December 2021. These updates aim to provide clarity and guidance in transfer pricing matters, ensuring compliance with international standards and promoting fairness in intercompany transactions.
