This is a guest article by Oliver Treidler and Dennis Fedorko, TPC GmbH, Berlin, Germany (See footnote 1 below). Oliver is a transfer pricing professional with over 15 years of experience. In 2017 Oliver established TP&C GmbH, an independent provider of transfer pricing services. He holds a PhD in Economics and is the author of two books on transfer pricing – Transfer Pricing in One Lesson (2020) and Transfer Pricing Survival Guide (2023). Dennis is a senior consultant at TP&C, which he joined in 2022.
Transfer pricing and tax professionals are forced to navigate a jungle of regulations enacted by fiscal authorities all over the globe. Associated enterprises, meaning entities linked through ownership or control, are subject to transfer pricing rules that govern their intercompany transactions. When it comes to transfer pricing documentation, the compliance burden of having to prepare Local Files, Master Files as well as country-by-country documentation is substantial. While digitization offers some relief, many of our clients are fighting an uphill battle to consolidate their data, manage their intercompany agreements and maintain contemporaneous documentation. In view of scarce resources, taxpayers thus welcome any effort of fiscal authorities to ease some of the bureaucratic burden.
In the following we give a brief overview of the most recent changes in Germany to the formal requirements regarding transfer pricing documentation – which despite having the stated intention of reducing bureaucracy, in fact place an additional burden on taxpayers. The arm’s length principle is the foundational standard for transfer pricing regulations in Germany, ensuring that transactions between associated enterprises reflect market conditions.
German transfer pricing rules are closely aligned with OECD guidelines, emphasizing the importance of proper compliance and documentation standards. When it comes to documentation requirements, particular attention must be paid to cross border transactions, as these dealings require thorough and accurate records to satisfy German tax authorities.
From a global perspective, Germany’s approach to transfer pricing is shaped by its commitment to economic co-operation, adhering to OECD and international standards to promote consistency and fairness in cross-border dealings.
Regulations apply to associated enterprises engaging in cross border transactions, and the updated requirements are relevant for entities and transactions that fall within the scope of Germany’s transfer pricing rules.
Our Starting Position – Germany’s “Old” Regulations
The most positive aspect of German regulations on transfer pricing documentation was that (up until 2025) taxpayers had to submit their Local File (Footnote 2) only upon request by authorities during a tax audit. Upon receipt of such a request, taxpayers had 60 days to compile and submit the Local File documentation. For so-called ‘extraordinary business transactions’ (extraordinary transactions), which are subject to contemporaneous documentation requirements, the taxpayer had only 30 days to submit the documentation upon request. This submission process reflected the documentation requirement for local files and extraordinary transactions, emphasizing the need for timely and complete records.
Importantly, there were no additional disclosure obligations in place. As such, in Germany we counted ourselves lucky to be exempt from the stricter reporting obligations in some of our neighboring countries, such as the transfer pricing report (“TPR form”) that Polish taxpayers need to file annually. Best practices for German transfer pricing, at least in the more budget conscious and resource constrained SME segment, used to involve compiling a Local File for a (usually) three-year period which contained a concise description of the main economic facts and circumstances, as well as a comparability analysis. In most cases a deliberate decision would be made about which intercompany transactions would be regarded as material (Footnote 3). For material transactions, most taxpayers would prepare a detailed quantitative comparability analysis (benchmark) (Footnote 4), whereas smaller transactions would be subject to a less detailed, pragmatic, analysis and plausibility considerations. Once such a Local File was established, it could be updated without too much effort. The Local File also needed to include relevant financial data to ensure compliance with regulatory requirements.
Unless an ‘extraordinary business transaction’ had occurred (see above), it was generally sufficient to update the financial information (transaction volumes and margins of tested parties) for the main transactions. When updating these records, it was important to document profit allocations among entities to demonstrate arm’s length results. Assuming that taxpayers were somewhat diligent in adhering to these best practices, they would generally not find it difficult to submit their Local File on time when requested during an audit. However, the audit process included a mandatory submission requirement for documentation, which enforced stricter deadlines during audits. During an audit, the following documents were required: the transaction matrix, local file, and supporting records, which had to be submitted automatically upon the announcement of a tax audit.
In short, while taxpayers were required to do their homework on the transfer pricing documentation, Germany was – from a comparative global perspective – characterized by somewhat lenient formalistic requirements, including disclosure requirements. Nevertheless, insufficient documentation could result in adjustments to taxable income, penalties, or a reversal of the burden of proof. The risks of non-compliance included legal and financial consequences, such as penalties or adjustments, if insufficient documentation was provided.
An Attempt to Reduce Bureaucracy – Germany’s Updated Transfer Pricing Regulations
The Fourth German Bureaucracy Reduction Act (“viertes Bürokratieentlastungsgesetz” – “BEG IV”) was passed on 26 September 2024. The German government’s expressed intention was to simplify administrative processes, reduce the bureaucratic burden on companies as well as advance digital transformation. (Footnote 5)
The DAC7 Implementation Act which came into force on 1 January 2023 had introduced a reduction of the time within which taxpayers were required to submit full scope Transfer Pricing Documentation (TPD), namely within 30 days of notification of a company audit (see section 90 paragraph 4 German Fiscal Code Abgabenordnung (AO)). The shortened time to submit would have applied as of 1 January 2025. The BEG IV aims to lessen the increased burden from the shortened time, by stipulating that in lieu of a full scope Local File, the taxpayer is to be merely required to submit a transaction matrix. This introduces a mandatory submission requirement for the transaction matrix and related documents, which must be met within the new, shortened deadline. (Footnote 6)
While this provision ostensibly reflects a reduction of administrative burden, the ultimate effect is hardly cause for celebration – as discussed below. The following figure summarizes the main features of the updated regulations that are effective as of 1 January 2025.
Starting with the general audit order, the shortened submission deadline of 30 days applies only to (Section 90 para. 4 AO-E):(Footnote 7) – Transaction matrix – Master file (if applicable) – Documentation of extraordinary business transactions
The figure above shows the required contents of the transaction matrix. The transaction matrix must not only detail the cross-border transactions but also justify the arm’s length price for each transaction, in line with OECD guidelines and German transfer pricing principles.
It seems evident that the required transaction matrix under the BEG IV will be much more comprehensive than the transaction matrix German taxpayers were used to preparing as part of their Local File (i.e. merely focused on cross-border transaction volumes and respective counterparties). Ultimately, the anticipated scope is not much lower compared to full scope factual documentation (Footnote 8). When considering the amount of time required to collate the necessary information internally (e.g. extracting and aggregating financial data, verifying the terms of intercompany agreements as well as specifying the nature of the business transaction and applied TP method), there seems to be little difference to preparing a full scope Local File. Economic analyses are essential for supporting transfer pricing positions and must be included to substantiate the chosen methods and outcomes.
The increased burden and audit risks for companies are significant, as various risk factors—such as incomplete documentation, inconsistencies in the transaction matrix, or failure to justify the arm’s length price—could trigger audits, adjustments, or penalties.
Lastly it is imperative to emphasize that the full scope Local File must (still) be provided upon separate request within 30 days. If a taxpayer fails to submit the required documentation on time, they may face cooperation delay penalties and surcharges. Under the new rules, a German entity has a clear responsibility to ensure timely and complete submission of all required transfer pricing documentation.
In the event of disputes or challenges regarding transfer pricing adjustments, mutual agreement procedures are available as a mechanism for resolving such disputes under applicable tax treaties.
Transfer Pricing Methods – The Technical Backbone
Transfer pricing methods form the essential framework for establishing arm’s length prices in intercompany transactions. In Germany, the selection and application of an appropriate transfer pricing method is a cornerstone of compliance with german tax regulations. The most frequently applied methods include the comparable uncontrolled price method, which benchmarks prices against those charged between independent parties; the cost plus method, which adds an appropriate markup to costs incurred; and the transactional net margin method, which examines net profit margins relative to an appropriate base.
German tax authorities expect taxpayers to carefully document the rationale behind their chosen transfer pricing method for each controlled transaction. This includes a thorough explanation of why a particular method is most suitable, given the nature of the intercompany transactions, the functions performed, and the prevailing economic conditions. Such documentation is a critical part of the Local File, which must be ready for submission to the tax authorities upon request. Ensuring that transfer prices are set and justified using robust pricing methods not only supports compliance but also reduces the risk of challenges during tax audits.
Intercompany Financing – New Scrutiny and Documentation
Intercompany financing arrangements, such as loans, guarantees, and other financial transactions between related parties, are now under heightened scrutiny by german tax authorities. With the updated transfer pricing regulations, taxpayers must provide comprehensive documentation for all intercompany financing transactions. This includes detailed information on the terms and conditions—such as interest rates, repayment schedules, and debt serviceability assessments—to demonstrate that these arrangements reflect arm’s length conditions.
A key new requirement is the inclusion of intercompany financing transactions in the so called transaction matrix, which must be submitted to the tax authorities upon request. This matrix offers a structured overview of all intercompany transactions, ensuring transparency and facilitating review by the authorities. Taxpayers are also expected to justify the interest rates applied, taking into account the creditworthiness of the borrowing entity and prevailing market conditions. Failure to meet these documentation requirements can lead to adjustments in transfer prices and the imposition of penalties, making it essential for taxpayers to maintain thorough and accurate records for all intercompany financing activities.
Country-by-Country Reporting – Global Transparency Requirements
Country-by-Country Reporting (CbCR) has become a central pillar of global transfer pricing transparency, particularly for multinational groups with consolidated revenues of at least EUR 750 million. Under these requirements, the Ultimate Parent Entity must submit a comprehensive report to the tax authorities in its relevant tax jurisdiction, detailing the allocation of income, taxes paid, and key business activities across all jurisdictions in which the group operates.
In Germany, the responsibility for receiving and processing the CbCR lies with the Federal Central Tax Office. The report must include data on the number of employees, assets, and business activities in each country, as well as the taxes paid and accrued. This information is then exchanged with tax authorities in other jurisdictions, enabling a coordinated approach to assessing transfer pricing risks and identifying potential areas of non-compliance. For German taxpayers, timely and accurate submission of the CbCR is essential to meet their reporting obligations and to support transparency in cross-border operations.
Advance Pricing Agreements – Proactive Risk Management
Advance Pricing Agreements (APAs) offer taxpayers a proactive way to manage transfer pricing risk by securing advance approval from the tax authorities on the transfer pricing method and arm’s length price for specific transactions. In Germany, APAs can be negotiated for periods of up to five years, with the possibility of renewal, providing long-term certainty for complex or high-value intercompany transactions.
To initiate an APA, taxpayers must submit a detailed application to the tax authorities, outlining the nature of the transaction, the proposed transfer pricing method, and supporting evidence for the arm’s length price. The authorities will then review the submission and engage in discussions with the taxpayer to agree on the terms of the pricing agreement. APAs are particularly valuable for transactions involving intercompany financing or the transfer of intangible assets, where pricing can be especially challenging. By securing an APA, taxpayers can reduce the risk of future disputes and ensure greater predictability in their transfer pricing compliance.
Transfer Pricing Audits – What to Expect in 2025
As transfer pricing regulations tighten, german tax authorities are expected to intensify their focus on transfer pricing audits in 2025. Taxpayers should be prepared for more rigorous scrutiny of their transfer prices, documentation, and compliance with the arm’s length principle. During a tax audit, authorities will typically request detailed information on the taxpayer’s transfer pricing policies, including the chosen transfer pricing method, the comparability analysis, and the underlying economic analysis supporting the transfer prices.
Auditors may also seek insight into the group’s organizational structure, business relationships, and financial transactions, requiring taxpayers to provide this information in a timely manner. The ability to demonstrate that transfer pricing policies are robust, well-documented, and aligned with the arm’s length principle is crucial. Inadequate documentation or failure to justify transfer prices can result in adjustments, penalties, and increased risk of double taxation. As such, German entities should prioritize transfer pricing compliance and ensure that all documentation requirements are met ahead of any potential audit.
Practical implications – much ado about little
More bureaucracy, not less. Some practitioners note that “the concrete effects of the BEG IV will ultimately depend on its implementation by the tax authorities” (Footnote 9). If tax authorities refrain from requesting full scope Local Files, a limited relief could conceivably result. Given the increasingly burdensome and hostile audits experienced in Germany in recent years, such an outcome seems to be wishful thinking. The need to prepare a robust (full scope) Local File has not been done away with. The obligation to create an “extended transaction matrix” coupled with the obligation to submit the document within 30 days without separate request thus simply creates an additional document which taxpayers have to compile.
For taxpayers having implemented a process to update their transfer pricing documentation (i.e. largely adhering to best practices outlined above), the additional work will likely be limited to copying and pasting the relevant information from their Local File into a new template for the extended transaction matrix. In fact, “copy / paste” would be highly recommended, as creation new formulations from scratch would exacerbate the risk of inconsistencies. The obligation to submit the extended transaction matrix will force taxpayers to be diligent and deliberate about how they present the information. There will be no “back-tracking”, e.g. where tax auditors discover inconsistencies between the transaction matrix and the Local File (e.g. the applied method) a more aggressive audit seems the likely result.
For taxpayers not having a Local File available and/or not having implemented a process for updating their transfer pricing documentation, the new regulations constitute a rather stern warning to prioritize actions to ensure compliance with documentation requirements. In addition, the process of compiling the extended transaction matrix will identify and highlight gaps. One example; while it would seem feasible to indicate that a specific transaction is based on a “verbal agreement” (rather than a written intercompany agreement), it will hardly cast a favorable light on a taxpayer if vague references of this nature are made for multiple transactions – especially when the corresponding transaction volumes are material. In such cases the likelihood of a tax auditor requesting a full scope Local File and exercising a high-level of scrutiny is increased.
As such, the BEG IV can best be understood as a teacher demanding that the pupils provide him with a summary of their homework. While every pupil is required to prepare the homework in full, those not submitting a neat summary will likely be in for a more critical assessment.
Footnotes
- In this article we provide our views on the German transfer pricing documentation requirements. Our views are based on our observations in coping with day-to-day transfer pricing issues in Germany – they do not constitute tax advice.
- In the interest of brevity, we do not discuss the legal basis or general concepts in detail. In terms of general content of Local File or Master File documentation, Germany closely adheres to the provisions stipulated in the OECD Guidelines. In the following, we will mostly focus on the formal documentation requirements pertaining to the Local File, as these are most affected by the changed regulations.
- Except for materiality thresholds on the obligations of having to compile a Local File (cross-border transaction volume exceeding € 6,000,000 for goods or € 600,000 for services) there are no published criteria for (transaction-specific) materiality thresholds – thus taxpayers need to exercise discretion on individual transaction in respect (proportion) to total transaction volume.
- Naturally, the focus would always be on ensuring a viable functional and risk analysis documented. Respective considerations, however, are out of scope of this article.
- The regulation was approved on 18 October 2024. A link to the BFM publication (in German) can be found here.
- As can be seen in the figure below the BEG IV (Section 90 para. 3 AO-E) results in a separation of the Local File into the following parts: 1) Overview of business transactions (transaction matrix), 2) Presentation of business transactions (factual documentation = „Sachverhaltsdokumentation“) and 3) Presentation of the economic and legal basis for agreeing arm‘s length („Angemessenheitsdokumentation“).
- In case the transaction matrix should not be provided, a surcharge fee of € 5,000 will likely apply analogously to penalties for the Local File (for more details on surcharges – see Section 162 para. 4 AO). Please note that a discussion on penalty regimes as well as burden of proof considerations is out of scope of this contribution.
- When considering that specifying (justifying) the applicable transfer pricing method is an integral part of the comparability analysis the scope of the transaction matrix is not much lower compared to a full scope Local File.
- See article here.