Amendments to the Administrative Principles on Transfer Pricing

Overview of the main developments:

1. Intra-group Financing

The revised regulation specifies the requirements for the examination of intra-group financing relationships in accordance with Section 1 (3d) sentence 1 no. 1 FTA:

• Substantiation of debt capacity: The burden of proof for the arm's length nature of the interest deduction in terms of substance and amount remains with the taxpayer and must be cumulatively fulfilled. To this end, the clarifications and simplifications of the modalities for proving debt capacity are to be welcomed. For example, the analysis in the “overall view of the circumstances” should show that there is a “predominance of probability” for the fulfillment of the criteria. This makes the debt capacity analysis unnecessary for ratings of BBB- and better (investment grade). The business purpose of the loan can be demonstrated in the form of forecasts/investment calculations. For existing loans that continue after 31 December 2024, the debt capacity requirements must be met by that date.
• Interest rates: Arm's length interest rates should be based on creditworthiness determined by the group rating. Nevertheless, a different individual rating can be used as counterevidence. Deviations from the group rating must be substantiated and presented on a case-by-case basis, taking into account the group's support. That the effect of group support and the associated explanations have been included based on common practice and opinions in the literature is to be welcomed. When determining the rating, (other) qualitative factors can also be taken into account. If a publicly announced rating is available, this is to be used as a priority. Similarly, the rating of the Deutsche Bundesbank is recognized.
• Business purpose test: Borrowing for the purpose of profit distribution does not contradict the purpose of the company only if it is carried out as part of a normal distribution policy.

The mere forwarding of loans via an intermediate company continues to be assessed as a low-function and low-risk service, which is to be remunerated with a risk-free return – the difference to the market interest rate is to be passed on to the risk-bearing company. However, the taxpayer is free to prove that the transaction is not a low-function and low-risk service.

2. Introduction of Amount B

The new VerwGr 2024 implements the simplified approach developed by the OECD for determining arm's length routine remuneration for certain low-risk marketing and sales activities as long as a DTA exists between Germany and the tax jurisdiction of the transaction partner and it is not a non-cooperative tax jurisdiction within the meaning of the Tax Haven Defense Act. This approach can optionally be applied from the 2025 assessment period, provided certain conditions are met.

3. Secondment of employees

The arm's length principle must now also be expressly observed for employee assignments. In this context, reference is made to the BMF letter of 12 December 2023 on the tax treatment of wages under double taxation agreements. The arm's length principle must also be observed for temporary employment.

Effects on practice

With the VerwGr 2024, the BMF has clarified and harmonized the transfer pricing regulations. At the same time, the changes require a careful review of financing structures and transfer pricing strategies. In particular, companies should ensure compliance with the new requirements for substantiating financing relationships and assess the impact of the Amount B regulations in order to benefit from the simplifications.