Sweeping Changes of German Tax Rules on Transfer Pricing
This Client Alert gives an overview of the most important adopted and expectable changes in German taxation of transfer pricing from 2016 to 2018:
1. Extension of scope of documentation obligations by the first BEPS Implementation Act: For fiscal years beginning after 31 December 2016.
- In future, information on the date when transfer prices are being set must be documented.
- The law "clarifies" that documents on the arm's length nature of transfer prices, namely comparable data, are a mandatory part of transfer price documentation.
- Domestic subsidiaries of EUR100 million or more in revenue are obliged to document their group's worldwide business activities and their system of setting transfer prices. This is supposed to be in line with OECD/G20 recommendations in the final report on action item 13.
The bill was adopted on 16 December 2016.
2. Introduction of country-by-country reporting for domestic groups with at least EUR750 Million revenue: For fiscal years starting after 31 December 2015.
3. Introduction of country-by-country reporting for domestic subsidiaries of foreign groups recording at least EUR750 million in revenue: For fiscal years starting after 31 December 2016.
Foreign enterprises will have the opportunity to do surrogate filing for fiscal years starting after 31 December 2015.
4. Enactment of selective changes to double tax treaties to implement OECD's BEPS recommendations using the OECD's Multilateral Instrument: Expected as from 2018.
The German Ministry of Finance, like other national fiscal authorities, is currently in the process of deciding which treaty articles and which treaties need to be adjusted to the OECD's BEPS recommendations. Inconsistent implementation and discrepancies between existing and new double tax treaties can be expected. It is of particular importance,
- whether Germany will broaden the concept of a permanent establishment and thus more frequently assume foreign permanent establishments of domestic enterprises and more frequently tax domestic permanent establishments of foreign enterprises; and
- how widespread mutual agreement procedures with a "guaranteed solution" by arbitration will become.
5. Changes to German CFC rules in § 7 ff. Foreign Tax Act (AStG) to implement the EU Anti-Tax Avoidance Directive (ATAD): Uncertain/open.
6. Further BEPS Implementation Act(s), for example containing a solution for hybrid mismatches: Uncertain, but demanded by Upper House of Parliament.
7. Authorization of the Ministry of Finance to repeal tax exemption of certain foreign income or items of income and to allow credit for foreign taxes paid: Starting 1 January 2017.
- This could, for example, mean German taxation of tax free foreign investment grants.
8. Introduction of an EU-wide, automatic exchange of information regarding tax rulings and advance pricing agreements (APAs): Starting 1 January 2017.
- Note: Also information in an application for APA with the US or another non-EU country may be subject to automatic information exchange.
9. A general overriding of tax treaties by domestic arm's length rules has not been introduced by Parliament.
10. Trade tax on passive income amounts earned in foreign subsidiaries and permanent establishments: Starting on 1 January 2017.
11. Neutralization of double dips for special business expenses in partnerships: Starting 1 January 2017.
- Example: Interest paid by a foreign partner of a German partnership on a loan passed on to the partnership shall not be deductible in Germany, if the foreign partner can deduct the interest as business expense in his state of residence.
12. Limitation of deduction of royalties paid to foreign, related licensors: For royalties paid or accrued after 2017
- Where foreign taxation of royalties in the licensor's hands is lower than 25 percent, the deductibility of royalties shall be reduced in proportion with the "undertaxation". The limitation is targeted at foreign IP boxes inconsistent with OECD standards, in particular with the OECD nexus approach (Action Item 5). The limitation will particularly hit royalties for intangible assets acquired by licensor or developed by related party service providers. Brand royalties will always be affected.
13. Final version of the administrative regulations on profit allocation to permanent establishments: Published in December 2016.
14. Specific administrative regulation on profit allocated to permanent establishments without personnel, such as servers, pipelines or wind turbines: Currently discussed.
Table of laws and rules, contents and date of application: