The Importance of Transfer Pricing for International Companies

1 Introduction

German companies are part of the global economy and maintain intensive relationships with foreign companies. To ensure tax compliance, special issues must be considered in business relationships between affiliated companies, particularly with regard to the determination of transfer prices.

2 Requirements for Affiliated Companies

The criteria for a foreign company to be considered an affiliated company are legally defined. Among other things, a participation of 25% or more or actual control is recognized as reasons for affiliation.

Example

A German company holds all shares in a foreign company and maintains business relationships. In this case, they are considered internationally affiliated companies.

3 Transfer Pricing Documentation

The tax transfer pricing documentation according to §90 paragraph 3 of the Fiscal Code (AO) includes factual and appropriateness documentation. This includes a detailed presentation of business transactions, group structures, functional and risk analysis, and value contributions.

3.1 Components of Factual Documentation

- Group structures

- Company history

- Business areas and strategy

- Contracts and business relationships

- Analysis of extraordinary business transactions

3.2 Components of Appropriateness Documentation

- Transfer pricing method

- Appropriateness documentation

- Data for arm's length comparison

4 Transfer Pricing Methods

The determination of internal transfer prices is based on specific methods such as the comparable uncontrolled price method, resale price method, or cost-plus method. Profit-oriented methods play a role, especially in complex corporate structures.

4.1 Routine Companies

- Simple functions and low profits

- Interchangeability in the value creation process

4.2 Strategic Entities

- Essential functions and high risks

- Significant tangible and intangible assets

5 Documentation Relief for Small Companies

Smaller companies can prepare transfer pricing documentation under simplified conditions, provided certain revenue thresholds are not exceeded.

6 Sanctions for Non-Compliance with Documentation Requirements

Failure to comply with documentation requirements may result in sanctions such as estimates by the tax office and fines. It is therefore advisable to properly document transfer prices.

7 Innovations from 2025

From 2025, the submission requirements for transfer pricing documentation in tax audits have been tightened. Companies must now provide certain documents more quickly and should therefore implement timely documentation.

If you have any questions, experts from the tax advisory firm are available to assist companies with tax matters.