On 5 July 2022, the German Federal Ministry of Finance published a draft decree-law regarding the transfer of functions. The aim of the draft decree-law is to adapt and restructure the existing regulations on the arm’s length principle with the current measures under the OECD Transfer Pricing Guidelines. The draft decree-law includes the following changes:
- Broader the definition of “transfer of functions”.
- Other benefits would be excluded from the materiality analysis and would be limited to intangible assets. Intangible assets are material in cases of the transfer of functions if they are necessary for the transferred function and the arm’s length price exceeds 25% of the sum of the individual prices of all assets and other benefits of the transfer package.
- The “escape clause” would apply to situations when the function is outsourced to a company that is exclusively compensated for services provided, based on a cost-plus method. A valuation of the transfer package in accordance with § 2 would be required if the receiving company provides these services independently, in whole or in part, to other companies at higher prices than at cost-plus.
- In the future, common valuation methods, such as the discounted cash flow (DCF) method, would need to be used for a two-sided calculation to determine the value of the transfer package.
These new regulations should apply retrospectively to all cases of functional transfers that begin after 31 December 2021.
