GERMANY Law and Practice Contributed by: Michael Best, Gerald Herrmann and Jannis Lührs, POELLATH
4.7 Transfer Pricing Disputes and Mutual Agreement Procedures Germany has concluded DTTs with 96 countries. Most of these DTTs follow the internationally used OECD Model Convention, which contains provisions on mutual agreement procedures (MAPs). More recent DTTs often contain provisions requiring arbitration to resolve a conflict following an unsuccessful MAP. More than half of the MAPs are transfer pricing dis - putes, and about 87% of those disputes are resolved by MAPs between the two states. MAPs are quite commonly used by the German tax authorities. 5. Taxation of Non-Local Corporations 5.1 Compensating Adjustments Generally, German tax authorities scrutinise compen - sating adjustments critically and will only recognise them subject to strict conditions. Consequently, com - pensating adjustments must be based on a previously agreed pricing method that is applied in predefined scenarios of uncertainty and must lead to an “arm’s length” result. The underlying Principles of Administrative Procedure have recently been updated. There are no reports on any particular difficulties in operating MAPs. On the contrary, based on MAP statistics from December 2024, only 2% of completed procedures involving Germany could not be settled, so the overall opera - tion of MAPs is deemed to be satisfactory. 5.2 Local Branches and Local Subsidiaries Generally, there are no differences between local branches of non-local corporations and local subsidi - aries of non-local corporations; however, in practice, there are usually problems, or at least discussions, regarding the allocation of income/expenses and assets. 5.3 Capital Gains of Non-Residents Capital gains of non-residents on a sale of stock in local corporations are taxed if the shareholding is at least 1%. However, the DTTs usually eliminate such taxation.
5.4 Tax Implications of Change of Control A change of control might result in the forfeiture of tax losses carried forward in the case of a change of at least 50% of the shareholding (see 2.4 Loss Relief ). Furthermore, RETT could be triggered by certain transactions with corporations/partnerships owning real estate (see 2.8 Other Taxes on Transactions ). 5.5 Formula-Based Income Attribution No specific formulas are used to determine the income of foreign-owned local affiliates selling goods or providing services, but it must be ensured that the determination follows the arm’s length principle. 5.6 Deductibility of Intra-Group Management and Administrative Charges There are no specific rules regarding deductions for payments by local affiliates for management and administrative expenses incurred by a non-local affili - ate. However, in general, the arm’s length principle and the transfer pricing rules must be taken into con - sideration. 5.7 Restraints on Related-Party Borrowing Any borrowing between related parties must comply with the arm’s length principle. The granting by a local affiliate of an interest-free loan or of one with an inter - est rate below market standards to a parent entity may result in a hidden profit distribution. In comparison, a loan granted with an interest rate that is above mar - ket standards to a parent entity may result in income adjustments in cross-border cases. 6. Taxation of Foreign Income of Local Corporations 6.1 Foreign Income Exemptions In principle, the worldwide income of local corpora - tions is taxed in Germany. The part of the income of a local corporation that originates from foreign sources that are taxed in the state of source with a tax com - parable to German corporate tax is taxed in Germa - ny, taking into account the tax paid abroad. If a DTT applies, the regulations laid down therein have prior - ity. A 95% tax exemption applies for dividends and capital gains from foreign sources if the shareholding
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