German Ministry of Finance issues new Administrative Principles regarding transfer pricing

Executive summary

On 14 July 2021, the German Ministry of Finance (MoF) issued the Administrative Principles Transfer Pricing (AP TP). Administrative principles in Germany represent a third element (in addition to the tax law and executive orders) of German tax provisions. Although not binding for taxpayers and courts, administrative principles serve as additional guidance for the interpretation and illustration of the tax law and executive order; accordingly, they are of significant practical importance for taxpayers. Publication of the AP TP follows recent legislative changes to Germany’s transfer pricing (TP) framework effective for fiscal years starting 1 January 2022.

The objective of the AP TP is the alignment of the German interpretation of the arm’s-length principle (ALP) to international standards. Specifically, the AP TP adopts the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines 20171 including Chapter X on Financial Transactions in 20202 (together the OECD Guidelines) for the examination of income allocation between related parties with cross-border transactions.

The AP TP introduces the OECD Guidelines as the key basis for the administrative guidance but provides additional interpretation and clarifications regarding the OECD Guidelines that are deemed necessary to ensure equal taxation from a German tax perspective. Most notably, the AP TP is effective immediately without any grandfathering provisions and for all open cases.

It is positive that the AP TP, as a central reference for all administrative TP matters, emphasizes the increased economic point of view in transfer pricing with the concept of aligning taxation with value creation and, e.g., clarifying that the ALP in Germany has to be consistently applied for inbound and outbound cases.

However, the AP TP deliberately deviates from the OECD Guidelines in certain aspects, in particular with respect to intercompany financing transactions. Consistent with ongoing tax audit experience, the BMF has introduced in the AP TP certain modified aspects of its highly debated positions from the most recent legislative proposals that have repeatedly failed to be enacted into law due to the opposition of the parliamentary group, which saw this as a one-sided deviation from the OECD standards.

While many of the addressed aspects have been commonly applied in practice, the AP TP provides a level of enhanced legal certainty, but the AP TP is also expected to further increase controversy in transfer pricing.

This Alert summarizes the key aspects of the AP TP.

Detailed discussion

The interpretation of the ALP by German tax authorities was widely anticipated following the revision of the OECD Guidelines and the recent legislative developments in Germany. The AP TP is intended to serve as the central reference for all administrative TP matters in Germany and replaces several previously issued administrative principles. The AP TP either directly provides guidance on a specific topic or includes references to other still applicable administrative principles and other international guidelines such as the OECD Guidelines or reports of the European Union (EU) Joint Transfer Pricing Forum (JTPF).

The key aspects of the AP TP are summarized below.

Principles of income adjustments

The AP TP emphasizes that the application of the ALP not only refers to the transfer price itself but also to the accurate delineation and the underlying conditions (e.g., prices, discounts, rebates, agreement duration including options to terminate or amend agreements, payment terms, price adjustment clauses) of an intercompany transaction (para. 1.5). Therefore, it is first required to analyze whether the intercompany transaction itself is arm’s length in principle followed by an analysis of the arm’s-length pricing. The fact that certain conditions alone are considered as not in line with the ALP does not give rise to a recharacterization of the intercompany transaction. An analysis is required to consider all objective circumstances for the specific underlying case (para. 1.22).

OECD Transfer Pricing Guidelines and additional references

The OECD Guidelines are generally applicable for the examination of income allocation between related parties with cross-border transactions to ensure an internationally uniform approach and to avoid double taxation and (double) non-taxation (para. 2.1). However, German tax authorities deemed it necessary to further clarify certain aspects of the OECD Guidelines to ensure equal taxation (para. 2.4). While it is positive that Germany officially adopts the OECD Guidelines, the claim to ensure equal taxation is somewhat contradicted by controversial positions taken, e.g., with respect to financial transactions or losses.

The AP TP emphasizes that the ALP is based on economic principles which are time and context specific. It notes that the discussions whether a static or dynamic interpretation of Article 9 OECD Model Tax Convention is applicable with respect to the ALP are not relevant (para. 2.3). According to the view of German tax authorities, the ALP is flexible enough to also consider actual developments such as ongoing digitalization without the need for further legislative measures. Particularly, contrary to the global developments related to the ongoing OECD Base Erosion and Profit Shifting (BEPS) project with respect to tax challenges arising from digitalization, the AP TP states that the ALP provides enough flexibility to address current developments in the digital economy without implementing additional legislative measures. Following this view, the AP TP is effective immediately without any grandfathering provisions for all open cases (para. 6.3). It is doubtful, that the arguments applied by the MoF are consistent with current OECD developments and German jurisprudence that repeatedly ruled for a static interpretation of the ALP.

Additionally, the AP TP directly refers to certain publications of the JTPF that are deemed helpful for the examination of cross-border transactions, in particular in transactions between Germany and EU Member States (para. 2.5). Hence, such publications are considered additional German administrative principles.


According to German tax authorities, the ALP assumes prudent and diligent business managers at each of the involved entities3 with full knowledge and information of the underlying facts and circumstances of the transaction. According to the AP TP, a prudent and diligent business manager will determine the arm’s-length price with due care based on data that is available or accessible. If and to which extent remuneration is required is to be based on the concept of a prudent and diligent business manager at each of the involved entities (para. 3.1). It is questionable if such German interpretation of the ALP is in line with the OECD Guidelines, in particular with respect to the application of one-sided TP methods, which only focus on the tested party.

Moreover, the affiliation of a taxpayer to a multinational group has to be considered in the transfer pricing examination. This means for the profit determination, according to the AP TP, that only the profit, which the taxpayer would have earned by being an affiliated company under an agreement considering third party conditions, is relevant and not the profit he would have earned as a completely independent company. Circumstances that result from the affiliation to a group or a multinational group of companies, do not solely authorize an income adjustment (para. 3.4).

The application of the ALP first requires a function and risk analysis of all parties involved in the transaction (para. 3.5). The core part of this analysis is the risk-control approach in which an allocation of risks takes place based on the (people) functions to control the risks as well as on the financial capacity to bear the risks. According to the AP TP, the decision-makers should possess appropriate experience and competencies and should also have a sufficient information basis (para. 3.6).

The functions, risks and assets that are allocated to a party as a result of such analysis are a measure for the value of the activity performed by this party compared to the total activity performed by the multinational group. Based on the description of the value creation process of the multinational group, a value contribution analysis can be performed. Such analysis should form the basis for the (function and risk) adequate allocation of the proportionate share of profits to a party from the total profits of the multinational group (para. 3.7).

It is not clear from the wording if the taxpayer can decide whether to perform not only a qualitative, but also a quantitative value contribution analysis. Moreover, it could also indicate the application of a profit split method although the value contribution analysis is not a transfer pricing method but serves to characterize the group companies (e.g., as a routine entity).

Further, the AP TP states that the options realistically available are to be considered in the application of the ALP.

Transfer pricing methods

The selection of the TP method follows the OECD Guidelines and determines that the most appropriate method for the underlying case should be applied. If comparable third-party data is not available, a hypothetical arm’s-length test should be applied utilizing economically accepted valuation techniques. The AP TP reiterates that the five TP methods (comparable uncontrolled price method, resale price method, cost plus method, transactional net margin method, transactional profit split method) are generally to be applied. However, it is emphasized that this list is not exhaustive. Particularly, the possibility to apply a combination of the methods or economically recognized valuation methods (such as capitalized income method and discounted cash flow method) is mentioned (para. 3.9 – 3.10). The explicit inclusion of other economic valuation methods is positive and reflects the increased focus on the economic point of view for German transfer pricing.

Point in time of arm’s-length analysis

The AP TP reiterates that an arm’s-length test should be based on arm’s-length data available at the time of concluding the agreement. In addition, a taxpayer can also use arm’s-length data that becomes known at a later point in time, if such data refers to the point in time when the transaction was agreed upon (para. 3.38).

When forecasted data is used to determine the transfer prices, a comparison between forecasted and actual results should be performed during the year or (at least) at the year-end. If actual results are outside of the arm’s-length range, retroactive adjustments are required (para. 3.40 - 3.42). If such retroactive adjustments are made to the advantage or disadvantage of an entity (e.g., by regularly adjusting to the upper or lower bound of the arm’s length range), such adjustments generally indicate non-arm’s length (contractual) conditions (para. 3.44).

It is unclear why the AP TP introduces an apparent need for a year-end adjustment mechanism as the MoF has been critical of such adjustments in the past and recent tax audit experience does not suggest a change in this position. It is also unclear how this provision is to be treated in light of the effectiveness of the AP TP for all open cases.


According to the AP TP, third parties would generally liquidate loss-making activities if there is no economically sound expectation to earn an appropriate total profit for such activity within a reasonable period of time. While there may be economic reasons for a multinational group that an affiliate continues to operate a loss-making business, such affiliate nevertheless has to be compensated appropriately by the affiliates that benefit from such business activity. The basis for such compensation is the annual profit before tax or where appropriate before profit/loss transfer. Routine entities are not expected to be in a loss-making position for extended periods of time and the AP TP demands loss-making entities to be profitable within a five-year period, with the total profit during this period being in line with the ALP and large enough to compensate prior losses (para. 3.31 – 3.37). This position , in particular during the global COVID-19 pandemic, goes beyond the OECD Guidelines and significantly increases the risk of double taxation for taxpayers.


The explanations of the AP TP with respect to intangibles are generally consistent with the OECD Guidelines. The DEMPE concept (Development, enhancement, maintenance, protection and exploitation of intangibles) is further specified (para. 3.53), however, the timing for the application of these provisions remains questionable. The recently introduced law including the DEMPE concept is applicable for fiscal years 2022 onwards, whereas the provisions in the AP TP are to be applied for all open cases without any grandfathering rule. Further notable aspects are:

  • A prudent and diligent business manager is only willing to pay compensation to the extent an appropriate operating profit remains from the use of the intangible.

  • The use of trademark rights within a multinational group is to be remunerated, if the use of the trademark rights result in economic advantages and third parties can be excluded from the use in a geographic region based on the legal system in this geographic region.

  • The AP TP includes a rebuttable assumption with respect to the determination of royalties by stating that license fees are regularly determined based on the hypothetical arm’s-length method.

Financing transactions

The AP TP states that Chapter X of the OECD Guidelines is applicable for the examination of the income allocation for financial transactions and also provides further clarifications. Notably, this chapter now contains certain modified aspects of the highly debated position of German tax authorities which were included in recent legislative tax proposals but were removed in the enactment of the final laws as parts of the German Parliament saw the MoF’s intention as a deviation from the OECD Guidelines.

The first step is to examine if the provision of funds is considered debt or equity from a tax perspective (para. 3.90). In order to recognize a loan arrangement and interest payments as in line with the ALP: (i) the financing needs to be economically required by the borrower; (ii) with an expectation of an appropriate return on investment that covers the financing costs; and (iii) the utilization of the borrowed funds should be aligned with the business purpose (e.g., not transferred to an intercompany cash pool or to a deposit account – para. 3.91). In essence, this introduces a “business purpose test” for financing transactions and poses the risk that debt is recharacterized as equity.

If a financing entity provides funds to a related party and does not have the capability and authority to control or capacity to bear the risk, the compensation for the provision of funds is limited to a risk-free return. The compensation is generally determined based on the cost plus method on the basis of substantiated and directly attributable operating costs. Refinancing costs are explicitly excluded from the cost base and have to be considered effectively with a risk-free return. That rule would also apply if a loan was granted by an equity financed intercompany lender (para. 3.92). Even though this aspect was ultimately dropped in the enactment of the ATAD implementation law, German tax authorities insist on their controversial position, which will likely increase the controversy in German tax audits.

According to the AP TP, securitization of loans is generally considered arm’s length, whereas non-securitization may be appropriate depending on the circumstances of the case. Relevant indications for an arm’s-length behavior that need to be analyzed in totality include, among others, the behavior of the group towards third party lenders, economic benefits of securitization and options realistically available (para. 3.95). This effectively reverses the burden of proof from the tax authorities to the taxpayer, that non-securitization is indeed considered arm’s length.

Similar to other intercompany transactions a function and risk analysis is required for financial transactions to accurately delineate the intercompany transaction (para. 3.89). As a result, taxpayers may need to increase documentation efforts to show that intercompany loan issuers indeed perform the people functions related to the issuance of loans, i.e., have the qualification and make decisions to take on risks and manage risks and also to actually perform these decision-making functions as well as have the capacity to bear associated risks.

The AP TP generally adopts the approach of Chapter X considering the effect of group support. In particular, depending on the importance of the entity for the group and the likelihood it would receive support from other group entities in case of insolvency, the stand-alone default probability and rating would have to be adjusted accordingly (para. 3.94).

A cash pool leader generally performs routine services. The compensation is regularly based on a cost plus method with acceptable mark-ups between 5% and 10%. However, each case needs to be analyzed separately and exceptions are possible depending on the actual function and risk profile of the cash pool leader.

The allocation of synergies across cash pool participants cannot be done based on a causation principle but should be assessed on a case-by-case basis taking into account the acceptance of any structure in foreign jurisdictions. In situations where cash pool members maintain debit and credit positions which, rather than functioning as part of a short-term liquidity arrangement, become more long term, a cash pool does not economically exist, but rather long-term loan arrangements, which are to be treated accordingly (para. 3.98 – 3.100).

According to the AP TP, guarantees and similar instruments that lead to an improvement of creditworthiness of a company need to be remunerated appropriately; this requires an actual assumption of risk through the guarantor (para. 3.96), However, for cases within the EU / European Economic Area, for guarantees that are required for the purpose of enabling an entity to assume debt from a third party, the risk assumption is considered as a shareholder contribution not to be remunerated, if there is an economic reason justifying the non-remuneration. Reference is made to the ruling of the European Court of Justice dated 31 May 2018 (para. 3.97) according to which a shareholder can have an own economic interest to enable a subsidiary to continue its business through the risk assumption.

Other key aspects

The AP TP generally follows the OECD Guidelines regarding the delineation and remuneration of services. Any service is only chargeable if third parties would be willing to pay for or provide such a service for a fee, respectively, if such services are provided by the group to third parties. Services are generally remunerated based on the cost-plus method, whereby a mark-up of 5% is deemed appropriate for low value adding services. Cost allocations may be used in cases where a direct allocation is not possible (para. 3.62 – 3.77).

The remuneration of cost contribution arrangements follows OECD Guidelines. In particular, contributions need to be remunerated based on the ALP, whereas a cost-based remuneration is generally not appropriate. However, it is positive that the AP TP explicitly refers to the exceptions with respect to the cost-based remunerations, which are applicable if the cost-value difference is marginal (e.g., provision of low value adding services), the administrative burden would be significant or the values of the contributions correspond to each other and are therefore balanced (para. 3.81 – 3.86).


The provisions of the AP TP apply to all open tax cases effective immediately. Against this background, taxpayers should review the changes, including the new interpretation of the ALP and determine any implications on their transfer pricing policy and documentation strategy.

For additional information with respect to this Alert, please contact the following:

Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft
  • Alessia-Maureen Dickler, Eschborn
  • Oliver Wehnert, Düsseldorf 
  • Michael Dworaczek, Düsseldorf 
  • Maren Holtz, Stuttgart 
  • Christian Scholz, Munich
Ernst & Young LLP (United States), EMEIA Transfer Pricing Desk, New York
  • Ronny Waldkirch 
  • Moritz Neumann 

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.

  • Show article references#Hide article references

    1. OECD (2017), OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017, OECD Publishing, Paris.
    2. OECD (2020), Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions 4, 8-10, OECD, Paris.
    3. Para. 1 (1) Sentence 3, German Foreign Tax Act.