The corporate tax rate can range approximately between 22.83-36.83% due to local trade tax rates. The overall income tax rate for corporations includes corporate income tax at a rate of 15%, a solidarity surcharge at a rate of 0.825% (5.5% of the corporate income tax), and local trade tax. The local trade tax generally varies between 7% and 21%.
The German legislation stipulates in Section 1 of the Foreign Tax Act the arm’s-length principle as the norm for related party transactions. Accordingly, the prices for those transactions have to be settled on these grounds applying, if possible, the traditional transfer pricing methods. The appropriateness of the transfer prices have to be laid out in a documentation, which is regularly requested as part of routine tax audits. The approach of the tax authorities to transfer pricing issues, in particular to acceptable pricing methodologies and competent authority proceedings, is undergoing continual change in response to international developments in these areas.
The Foreign Tax Act or Außensteuergesetz (AStG) is the main source for transfer pricing guidance. Section 1 AStG contains rules on:
A definition of the arm’s-length principle, including the notion that also unrelated parties would have knowledge on all relevant facts and circumstances of the transaction and would act as prudent and diligent business managers. This definition is supplemented by the hypothetical arm’s-length principle that shall be applied if the set of comparables does not meet limited comparability requirements.
A definition of related parties, which means an ownership of 25% or more.
Establishment of the preference of traditional transaction based methods; and the limitation of profit based methods to cases where the three traditional methods are not appropriate.
Emphasis on the adjustment of transfer pricing ranges; if no fully comparable data exists, transfer pricing ranges need to be narrowed. When a taxpayer selects a transfer price outside of the range, the adjustment will be made to the median of the range.
Introduction of the Transfer of Function rules, which leads to the establishment of an exit taxation, if certain functions, risks, assets, and opportunities are relocated.
General authority to adjust transfer prices that do not meet the arm’s-length requirement, including a price adjustment mechanism that allows for adjustments within a ten-year period.
In Germany the OECD TPG can be seen as interpretation aid if the specific topic is not governed by our domestic legislation or by administrative order. They also have practical relevance in MAPs and APAs.