Changes in German transfer pricing regulations and their possible effects on Spanish companies


Germany’s Ministry of Finance has introduced a draft law on 10 December 2019 that includes implementation of the EU anti-tax avoidance directive (ATAD). This legislative change is performed in order to align the German regulations with the OECD transfer pricing guidelines and the BEPS Project.  Likewise, the main objective of this draft law is to introduce a more precise version of the German interpretation of the arm’s length principle.

What implications can have these regulatory changes for Spanish companies?

In Spain there are more than 3,000 Spanish subsidiaries of German parent companies, which can benefit from the regulatory changes in transfer pricing applicable in Germany.

From a transfer pricing documentation point of view, an important aspect raised in the draft law is the modification of the turnover threshold to set the obligation for preparing the group report (Masterfile).

In addition, it is important to remember that the Transfer Pricing Guidelines suggest that this report should be prepared by the parent company, since it is the company that probably has all the necessary information for its elaboration and it will be able to create a valid document for all the entities of the group.

So far, according to German regulations, only corporate groups that had a turnover higher than 100 million euros were required to have the Masterfile report.

However, Spanish regulations require the Masterfile document to corporate groups whose turnover exceed 45 million euros.

This difference in the standard requires that a Spanish subsidiary of a German parent company must prepare the Masterfile report when the parent company has no obligation to prepare it, which entails a great dedication and effort to obtain a huge amount of information in order to complete the report.

Nevertheless, if the draft law published in Germany is finally approved, German companies will be required to have the Masterfile when the amount of the group’s turnover exceeds 50 million euros, which is in line with the Spanish regulations.

As a consequence, it is possible that many Spanish subsidiaries of German parent companies will not have to prepare the Masterfile report because the parent company will have to do it and, thus, there will be a single document valid for all the entities of the group.

Apart from the indicated change, the draft law includes the following modifications:

  • Hierarchy of transfer pricing methods

The draft law proposes to abolish the hierarchy of methods to determine the transfer pricing method to be used in the analysis of transactions. Henceforth, the most appropriate method will be adopted for each specific case, considering the advantages and disadvantages of each one. If an appropriate method cannot be identified for a specific case, the tax law stipulates that the taxpayer must justify compliance with the arm’s length principle. In this sense, the German regulation is similar to Spanish regulation.

  • Arm’s length range

On the other hand, the adoption of the interquartile range is proposed as a general range approach resulting from the economic analysis. Likewise, the median shall be used as the default anchor for adjustments when the priced (margins) actually realized by the taxpayer fall outside of the interquartile range. However, the taxpayers must justify any deviation from the default presumption or anchor by providing that the approach (or value) is commensurate with the arm’s length principle.

  • Intangibles

The draft law also implements the concept of analysing the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets into the German transfer pricing law. However, the German law does not provide details that could help for the application of the DEMPTE concept.

  • Financial transactions

The main aspect of the draft law with regard to the financial transactions is that the tax deductibility of any interest expense related to financial transactions would be denied by the German tax administration, unless:

– The debtor would be able to serve the debt (including both interest payments and principal repayment) over the term of the debt, and was able to do so at the time the loan was granted; and;

– The loan would be required from a business perspective and the funds are used for company’s business purpose.

  • Related party definition

The draft law extends the definition of related parties to avoid tax evasion that would occur in cases in which related entities issue non-voting shares or enter into voting agreements.

To conclude, it seems that Germany is committed to the Arm’s length Principle and reinforces its documentation requirements for transfer pricing taxpayers. And, as we have indicated previously, at least one of these changes (in particular the Masterfile modifications) can be positive for Spanish companies, as their administrative burden could be reduced.

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