Germany vs X GmbH & Co. KG, October 2022, European Court of Justice, Case No C-431/21

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A Regional Tax Court in Germany had requested a preliminary ruling from the European Court of Justice on two questions related to German transfer pricing documentation requirements.

  1. whether the freedom of establishment (Article 49 TFEU) or the freedom to provide services (Article 56 TFEU) is to be interpreted in such a way that it precludes the obligation to provide transfer pricing documentation for transactions with a foreign related parties (Section 90 (3) AO) and
  2. whether the sanctions regulated in section 162(4) AO could be contrary to EU law

The Regional Tax Court considered that these provisions establish special documentation requirements for taxpayers with transactions with foreign related parties. In the event of non-compliance with these documentation requirements, section 162(4) AO leads to a sanction in the form of a fine/surcharge. Neither was provided for taxpayers with transactions with domestic related parties. However, such discrimination can be justified by compelling reasons in the public interest. In this context, the Regional Tax Court considered the legitimate objective of preventing tax avoidance and the preservation of the balanced distribution of taxation powers between the Member States as possible grounds for justification. However, the Tax Court was not confident in regards to the level of sanctions – i.e. whether the fine/surcharges went beyond what was necessary to achieve the intended purpose.

Judgement of the European Court of Justice

The Court ruled that German transfer pricing documentation requirement and related sanctions was not in conflict with EU law.

“Article 49 TFEU must be interpreted as meaning that it does not preclude national legislation under which, in the first place, the taxpayer is subject to an obligation to provide documentation on the nature and content of, as well as on the economic and legal bases for, prices and other terms and conditions of his, her or its cross-border business transactions, with parties with which he, she or it has a relationship of interdependence, in capital or other aspects, enabling that taxpayer or those parties to exercise a definite influence over the other, and which provides, in the second place, in the event of infringement of that obligation, not only that his, her or its taxable income in the Member State concerned is rebuttably presumed to be higher than that which has been declared, and the tax authorities may carry out an estimate to the detriment of the taxpayer, but also that a surcharge of an amount equivalent to at least 5% and at most 10% of the excess income determined is imposed, with a minimum amount of EUR 5 000, unless non-compliance with that obligation is excusable or if the fault involved is minor.”

ECJ C-431-21

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