AGN EMEA Tax Committee News.
The requirement to create transfer pricing documentation impacts not just large corporations, but also small and medium-sized businesses (SME’s), who often lack awareness of this obligation. It’s crucial to address this issue promptly to prevent time constraints and potential penalties from tax authorities if documentation becomes necessary.
Read on for a summary of the obligations that exist in Germany and what you should be prepared for.
Who is affected ?
All domestic taxpayers (sole proprietorships, partnerships, corporations etc.) with business relationships with related parties abroad are affected. This means that also subsidiaries of foreign parent companies domiciled in Germany – with which regular business relationships exists – are concerned.
What are the contents and the size criteria?
With regard to the content of the facts to be documented, Germany follows the tripartite OECD approach. Depending on the size of transactions, the following documentations must be prepared and kept available by the taxpayers:
Country-related, Company-specific Documentations “Local File”
| Size criteria: | Content: |
|---|---|
| Turnover from deliveries of goods with related parties: EUR 6 million or; Turnover from provision of services with related parties: EUR 600,000. If a taxpayer exceeds alternatively one of these criteria in the course of a financial year, the taxpayer is obliged to prepare a “Local File” from the beginning of the following year on. If both of these criteria are not met in a financial year, the obligation to prepare a “Local File” ceases to apply from the beginning of the following financial year on. | In a documentation of the circumstances: General information on the shareholding structure, business operations, and organizational structure. Records of the business relationships: Function and Risk analysis. In a documentation of appropriateness: Transfer pricing analysis. Extraordinary business transaction must be recorded separately and promptly in a period of six months after the end of the fiscal year in which they took place. |
Core Documentation “Master File”
| Size criteria: | Content: |
|---|---|
| Total turnover of a taxpayer: EUR 100 million per year. | Overview of the global business activities of a multinational group of companies and the transfer pricing methods applied. |
Country-by-Country Reporting “CbCR”
| Size criteria: | Content: |
|---|---|
| Preparation by a group parent company in Germany whose consolidated turnover in the previous financial year is greater than or equal to EUR 750 million. | Information to the tax authorities with an initial assessment of tax transfer pricing risks and other risks relating to profit shifting and profit reduction with regard to group related companies. The CbCR contains three tables. The first table shows the country-by-country breakdown of revenue (divided into revenue with third parties and related parties), profit before tax, income tax payable, recognized capital, retained earnings, number of employees and tangible assets. The second table provides an overview of the main business activities of the individual related parties in the concerned countries. And the third table optionally contains further information and explanations. |
Language:
The records (Local File, Master File and CbCR) must always be prepared in German language. The tax office may authorize deviations on request. In practice the submission in English is generally accepted, but should be applied in advance.
Transfer Pricing Deadlines:
The CbCR must be submitted electronically to the Federal Central Tax Office within one year after the end of the financial year being reported on.
According to the legal situation valid until 31 December 2024, the submission of a Local File or Master File should only be requested as part of a tax audit. The submission must be made upon request within a period of 60 days. Records of “extraordinary business transactions” must be submitted within 30 days.
From 1 January 2025, the submission deadlines and powers of the tax office to make requests will become significantly stricter. From this date, the tax office can request the submission of a Local File or Master File at any time, i.e. not only as a part of a tax audit. The records must then be submitted within 30 days after request (no longer differentiating between ordinary and extraordinary business transactions).
In addition, from 1 January 2025, tax payers will be obliged to submit Local File or Master File within 30 days, if they only receive an order for a tax audit. An explicit request to submit the documentation is no longer required in this case.
Against this background, the obligation to submit the documentations within 30 days must therefore be expected at any time! Tax payers have to be prepared at any time, if they exceed the mentioned thresholds.
Tranfer Pricing Sanctions:
If no records are submitted, the submitted records are essentially unusable or records of extraordinary transactions are not delivered in a timely manner, it is legally presumed that the taxpayer’s actual income is higher than declared and the tax authorities are entitled to make estimates.
If records are not submitted or if they are essentially unusable, a surcharge of between 5 and 10 per cent of the additional amount of income – but at least EUR 5.000 – is to be imposed at the discretion of the tax authorities. If the transfer pricing documentation is usable but was submitted late, the surcharge is up to EUR 1 million at the discretion of the tax authorities, but at least EUR 100 for each full day the deadline was exceeded.
Conclusion and recommendation:
The topic of transfer pricing documentation is not only relevant for large companies, but also for SMEs with cross-border relationships with related parties if they exceed the mentioned thresholds.
Depending on the scope of the relevant business transactions exist different obligations to prepare a Local File, Master File or a CbCR.
In any case, the concerned taxpayers should be aware of the changed and stricter requirements of the tax authorities from 1 January 2025 on and have the necessary reports available at all times.
For further information, please click here to read the full publication.
Brought to you by the AGN EMEA Tax Committee
If you have any questions related to transfer pricing documentation in Germany, please contact Norbert Mevissen.
Norbert Mevissen
Steuerberater
Fachberater für Internationales Steuerrecht
Tax Partner
Schaffer & Partner Audit & Tax and Schaffer & Partner Legal
www.schaffer-partner.de
