Implemented modifications to the German Transfer Pricing Legislation

By Dr. Björn Heidecke (Director, Transfer Pricing, Deloitte, Germany) & Neeraj-Kumar Popat (Senior Manager, Transfer Pricing Deloitte, Germany)

On June 8, 2021 Germany implemented modifications to the Transfer Pricing Legislation in both the Foreign Tax Act (Außensteuergesetz) and the Fiscal Code (Abgabenordnung). Most of the modifications were already proposed with a previous initiative in March 2020 (for further information see Link: Proposed modifications to the German Transfer Pricing Legislation), however, this initiative was excluded from the final legislation passing process. In a subsequent initiative, most of the modifications from the previous initiative were included and proposed in January 2021. This proposal was now finally implemented in June 2021.

This article aims at providing an overview of the most significant changes through the implemented modifications and at the same time highlighting the changes as compared to the initially proposed initiative.

Hierarchy of methods and comparable data

The hierarchy of transfer pricing methods was eliminated, which means that traditional methods (CUP, Resale Minus and Cost Plus) do not any longer have to be preferred over the transactional methods (Profit Split and TNMM) and – in line with the OECD Guidelines – the best method suitable for the respective transaction has to be selected. 

For a lager set of data, the arm’s length range has to be determined based on the interquartile range as the standard statistical tool for narrowing the range. This approach is a common and accepted practice in Germany, but so far was only discussed in German Administrative Principles which is not binding for taxpayers (and not in German law).


The modified law implemented the DEMPE concept of the OECD in German law, based on which the formal ownership of intangible property should be considered as a starting point, while the assumption of the DEMPE functions should be decisive for the allocation of the profits associated with the intangible property. The focus within tax audits will be more and more on underlying substance, i.e. location of decision takers, risk management and budget decisions.

Besides, the modified law clearly stipulates that the financing of the DEMPE functions does not entitle to the returns associated with the intangible, however, such functions have to be remunerated appropriately.

Relocation of functions rules

The German relocation of function rules were so far applicable for restructurings, in which a function along with assets and associated opportunities was transferred. The parameters for the qualification of a case as a relocation of function was expanded and based on the modified law, the rules are now applicable for restructurings, in which a function along with assets or associated opportunities is transferred. In other words, just a relocation of functions with associated business opportunities (without any tangible or intangible assets) qualifies as relocation of function, potentially requiring a valuation of the transferred package.

Regarding the valuation approach, two of three escape clauses – allowing for a simplified valuation with a limited capitalization period – were eliminated. The only remaining escape clause requires that no essential intangible assets and associated business opportunities are part the transfer. In this regard, requirements for the remaining escape clause were further enhanced, making the escape clause only applicable if the party receiving the function exclusively provides services to the transferring party and is remunerated based on the cost plus method (pure outsourcing).

Though the modified law significantly tightens the options for the taxpayer and has a stronger tendency for a full-blown valuation. In comparison to the previous draft (March 2020), it means a partial relief, since the previous draft proposed the exclusion of all escape clauses.  

Price adjustment clause

The previous version of the law stipulates that so-called price adjustment clauses needs to be agreed upon in relocation of function agreements. In case no price adjustment clause is outlined, a 10-year default period was assume, i.e. in case the price for a valuation of a relocation of function differed significantly from the original value e.g. due to differences between planning and actual data, an adjustment mechanism of the price is due. The modified law reduces the default period for a price adjustment in case of significant deviations from 10 to 7 years. It also enhances the applicability to intangible transactions and not only relocation of functions.

The revised rule allows tax authorities to perform a price adjustment in cases where the transaction partners have not concluded a price adjustment clause and – within the specific default period – the actual outcome significantly deviates from the planning data (to the disadvantage of the German taxpayer). A significant deviation exists if the price initially agreed upon deviates by more than 20% based actual data, unless the taxpayer can prove that the reasons for the deviations were not predictable or were reliably considered at the time of concluding the agreement.

APA rules

The APA rules were newly implemented into the Fiscal Code. Previously, the detailed approach for an APA was only defined in a circular of the Federal Ministry of Finance.

The main changes for the APA procedure relate to the fact that the fees for an APA application are increased from EUR 20,000 to EUR 30.000 and for APA extensions from EUR 10,000 to EUR 15,000. Besides, the process of a Fast-Track-APA was introduced, which aims at the continuation of an outcome achieved in the course of a cross-border Joint Tax Audit. The fees for such a Fast-Track-APA are EUR 7,500.

Excluded changes

Some changes proposed by the initial initiative in March 2020, were not included in the subsequent proposed initiative in January 2021 and thus were not part of the implemented modifications.

Threshold and mandatory filing for Master Files: The proposed reduction of the revenue threshold for the preparation of a Master File (i.e. reduction from EUR 100m to EUR 50m) as well as the mandatory filing at the end of a fiscal year are not any longer relevant.

Financial Transactions: The tightening rules for financial transactions (loans, cash pooling, hedging, guartees) that basically authorized the German tax authorities with a treaty override, are also excluded and are not any longer relevant.


The modifications became effective on June 9, 2021 (one day after their publication). The new APA rules are applicable for all applications submitted after 09.06.2021, while changes in the Foreign Tax Act are applicable first time for fiscal years 2022 onwards. In this regard, it is important to notice that for companies with deviating fiscal years, the modified legislation in the Foreign Tax Act would become effective for all fiscal years started in and after 2021 (i.e. fiscal year end 2022) onwards.


The implemented modifications should be considered as a move of German tax legislation towards the BEPS concept of the OECD, which took some efforts and attempts but finally made their way through. The implemented changes are for the most part identical with the initially proposed initiative (March 2020) and therefore are not highly surprising – in particular given that fact that the subsequent initiative from January 2021 reflected all relevant changes, which were part of the finally implemented modifications.

Implemented modifications to the German Transfer Pricing Legislation

Dr. Björn Heidecke is Director, Transfer Pricing at Deloitte, Germany.


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