BMF publishes Administrative Principles Transfer Pricing 2023

BMF publishes Administrative Principles Transfer Pricing 2023

On June 6, 2023, the German Federal Ministry of Finance (BMF) issued new administrative principles on transfer pricing (VWG Transfer Pricing 2023, IV B 5 - S 1341/19/10017 : 003). After just under two years, the previous Administrative Principles on Transfer Pricing from 2021 will be replaced (see blog post of July 26, 2021). The VWG Transfer Pricing 2023 are to be applied to all open cases.

The new version focuses in particular on changes in the area of the price adjustment clause and on financing relationships within the group. The position of the tax authorities on the transfer of functions taxation is now also integrated, which is to be applied to transfers of functions after December 31, 2021 in accordance with the revised Transfer of Functions Regulation (see blog post from September 1, 2022).

Funding relationships

In practice, there is the constellation that a group company extends a loan, but another group company exercises the control function related to this financing relationship. The VWG Transfer Pricing 2023 point out that with regard to this other (domestic) group company, it must be examined whether this constitutes a further transaction and how such a transaction is to be remunerated (marginal no. 3.125). In the event of a discrepancy between the granting of a loan and risk control, an income adjustment - if at all - no longer has to be made at the level of the borrower, with which the German tax authorities now follow the view of the OECD. It is also implied that all this is part of a transfer pricing documentation (local file).

In addition, the VWG Transfer Pricing 2023 indicate that the German tax authorities will soon publish the BFH ruling of May 18, 2021 (I R 4/17) on the determination of arm's length interest on loans in the group in the Federal Tax Gazette and thus recognize it beyond the individual case decided (see blog post of October 26, 2021).

In addition, the VWG Transfer Pricing 2023 now explicitly state that not only secured but also unsecured loans can be at arm's length (marginal no. 3.128). After all, third parties regularly agree on a wide variety of secured and unsecured debt financing. In addition, it is now explicitly recognized that the interest rate of an unsecured loan may include risk compensation. However, the assessment criteria and aspects cited in this context as to whether non-collateralization between related parties is customary for third parties continue to appear contrived and impractical in some cases.

Price adjustment clause

Section 1a of the German Income Tax Act (AStG) regulates in principle a price adjustment (ex-post) in the transfer of intangible assets, according to which, in the event of a significant deviation in value (more than 20%) in the eighth year after the conclusion of the transaction, a legally mandated price adjustment, i.e. an income adjustment, is required. However, the provision provides for several exceptions as to how such an adjustment can be avoided.

The VWG Transfer Pricing 2023 recently states that in cases where a proper price adjustment clause has been contractually agreed, the application of Section 1a AStG is excluded (para. 3.136). This statement is undoubtedly correct and its clarity is to be welcomed. However, it remains (still) unclear how a price adjustment clause must be contractually structured in order to be recognized as "appropriate". In practice, questions arise in particular as to when (e.g., as early as the second year) and how often (e.g., as early as one-time application) a contractually agreed adjustment mechanism should take effect.

Transfer of Functions

In a much shorter version than in the previous VWG on Transfer of Functions from 2010, the tax authorities are now integrating their view on the taxation of transfer of functions (FVerl) pursuant to Section 1 (3b) of the German Income Tax Act (AStG) and the recently revised Transfer of Functions Ordinance into the VWG on Transfer Pricing 2023.

The tax authorities continue to recognize that the secondment of personnel per se does not regularly constitute a FVerl (marginal no. 3.95). However, it should be viewed critically that in cases of personnel secondment, an FVerl should now exist if the seconded personnel takes their previous area of responsibility from the seconding company with them and performs the same activity in the receiving company. In company practice, however, this should often be the reason for the posting. For example, in the case of foreign expansion, a certain amount of development work is performed by personnel seconded by the parent company, particularly at the beginning.

In the case of a duplication of functions, the tax authorities have so far taken the view that there should be no FVerl in the case of only a minor restriction of the function in question. The fact that the so-called de minimis limit has now been deleted without replacement in VWG Transfer Pricing 2023 has a significantly aggravating effect.

Practical implications for companies

It is to be welcomed that the tax authorities now also expressly recognize unsecured loans within the group as at arm's length. The fact that this can be reflected in the interest rate has always been logical, but is now finally undisputed. Another positive aspect is that a proper, contractually agreed price adjustment excludes the application of Sec. 1a AStG. In practice, however, it remains unclear how an "appropriate" price adjustment clause is to be structured.

The tightening in the area of FVerl should be viewed critically. In particular, the abolition of the de minimis limit and the restrictive interpretation in the area of personnel secondment are likely to cause discussions in future tax audits. From the point of view of the taxpayer, this leads to the necessity to deal more intensively with the international regulations and to reconsider existing agreements and structures.