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Germany: Transfer pricing adjustments for cross-border arrangements referred to CJEU

Transfer pricing adjustments in Germany

A German court has referred a case concerning the German transfer pricing rules to the Court of Justice of the European Union (CJEU). At issue is whether certain provisions in German law requiring a transfer pricing adjustment for transactions involving German and foreign related parties are compatible with EU law when no adjustment is required for transactions solely between German related entities.


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The German transfer pricing rules require an adjustment to the tax base of a German resident taxpayer, under the arm’s length principles, if that taxpayer’s tax base has been reduced because of a transaction or business relationship with a non-German related party and the terms of the transaction or relationship are such that would not have been agreed to by independent parties in similar circumstances. For transactions between German entities, an adjustment is not required.

Issue referred to CJEU

In the case referred to the CJEU by the Lower Tax Court of Rhineland-Palatinate, a German parent company had given guarantees and letters of comfort to banks with respect to loans made to foreign subsidiaries, but without requiring any payment or consideration. In general, independent parties would not have concluded such an arrangement without payment. 

The Lower Tax Court of Rhineland-Palatinate expressed doubts as to whether the imputation of income under the German transfer pricing rules with respect to these transactions was compatible with the freedom of establishment under EU law. In a case involving similar circumstances (but concerning Belgian transfer pricing rules that provided similar adjustment provisions), the CJEU found that the applicable Belgian transfer pricing rules did amount to a restriction on the right to freedom of establishment.

According to the CJEU, the rules could be justified on the grounds of preserving the allocation of taxing rights among EU Member States and for addressing tax avoidance. The CJEU also held that the Belgian rules were proportional because they allowed taxpayers the opportunity to provide evidence of any commercial justification for the arrangements.

In this context, the Lower Tax Court of Rhineland-Palatinate noted that the German rules do not provide an explicit mechanism for taxpayers to prove an exception based on commercial justifications so as to prevent the transfer pricing adjustment. Accordingly, the case was referred to the CJEU to clarify whether the transfer pricing rules in Germany constitute a restriction on the freedom of establishment, given the different treatment for cross-border arrangements when compared to wholly domestic situations. The case is pending consideration by the CJEU.


Read a 2016 report [PDF 366 KB] prepared by the KPMG member firm in Germany

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