Unofficial English Translation
Draft bill
of the Federal Ministry
of Finance
Ordinance on the
application of the arm's length principle pursuant to section 1 (1) of the
Foreign Tax Act in cases of cross-border relocation
of functions
(Function
Relocation Ordinance - FVerlV)
A. Problem and goal
With the Act to Modernise the Relief from Withholding Tax and the
Certification of Capital Gains Tax (Withholding Tax Relief Modernisation Act - AbzStEnt- ModG) of 2 June 2021 (Federal Law Gazette I p. 1259), the
regulations on the arm's length principle were adapted to the current OECD
Transfer Pricing Guidelines and restructured. In this context, the provisions
on the transfer of functions were specified and transferred to a new paragraph
3b in section 1 of the Foreign Tax Act (AStG).
Regulations on the transfer package from the previous Transfer of Functions
Ordinance (FVerlV) are now defined in the Act. As a
result, the regulations of the previous FVerlV no
longer refer to the current version of the Act or have become obsolete through
their inclusion in the Act.
B. Solution
Pursuant to Section 1
(6) AStG, the Federal Ministry of Finance
is authorised to issue a statutory order, with the consent of the
Bundesrat, regulating the details of the uniform application of the arm's
length principle within the meaning of Section 1 (3b) AStG.
In addition to cases of the deferral of profits from permanent establishments,
this power to issue a statutory order will continue to be used only for cases
of the transfer of functions in order to ensure legal certainty and clarity in
this area. The ordinance is intended to ensure, even more specifically than in
the law, that taxpayers and the administration find competitively neutral
solutions that are acceptable in an international context. Germany's taxation
rights are to be exercised appropriately in the sense of equality of taxation.
The revised ordinance does not go beyond the previous ordinance, but reorganises the regulations in distinction to the law.
C. Alternatives
None.
D. Budgetary expenditure
without compliance costs
The ordinance serves to
secure tax revenue.
E. Compliance
costs
E.1 Compliance burden
for citizens
The ordinance does not
lead to any change in the compliance burden for citizens.
E.2 Compliance costs for
the economy
The regulation does not
lead to any change in the compliance burden for business.
Of which bureaucratic
costs from information obligations
The regulation does not
lead to any change.
E.3 Fulfilment expenditure
of the administration
The regulation does not
lead to any change in the compliance burden for the administration.
F. Further costs
No other direct costs
are incurred by the economy, including small and medium-sized enterprises.
Effects on individual prices and the price
level, especially on the consumer price level, are not to be expected.
Draft
bill of the Federal Ministry of Finance
Ordinance on the
application of the arm's length principle pursuant to section 1 (1) of the
Foreign Tax Act in cases of cross-border relocation of functions
(Function Relocation
Ordinance - FVerlV)
From ...
On the basis of section
1(6) of the Foreign Tax Act of 8 September 1972 (Federal Law Gazette I p.
1713), as amended by the Act of 2 June 2021 (Federal Law Gazette I p. 1259),
the Federal Ministry of Finance decrees:
A s s e
s s m e n t 1
A l l s o m e v e r a t i o n s
§ 1
General provisions
(1) A function is a business
activity that consists of a grouping of similar operational tasks performed by
specific units or departments of an enterprise. It is an organic part of an
enterprise, without the need for a sub-operation in the tax sense.
(2) A transfer of functions
within the meaning of section 1(3b) of the Foreign Tax Act occurs if a
function, including the associated opportunities and risks as well as any
assets or other benefits that may have been transferred or left along with it,
is transferred or left in whole or in part so that the acquiring company can
perform this function or expand an existing function. The function transferred
as a whole in accordance with sentence 1 constitutes the transfer package.
Business transactions that are realised within
five business years shall be combined as a single transfer of function at the
time when the requirements of sentence 1 are economically fulfilled by their
joint realisation.
(3) In cases of transfer of
functions, intangible assets are essential within the meaning of section 1(3b)
sentence 2 of the Foreign Tax Act if they are necessary for the transferred
function and their arm's length price amounts in total to more than 25 per cent
of the sum of the individual prices of all assets and other benefits of the
transfer package and this is credible, taking into account the
effects of the transfer of function, which are evident from the
records within the meaning of section 2
sentence 2.
(4) If an acquiring
enterprise independently provides the services previously provided exclusively
to the transferring enterprise, in whole or in part, to other enterprises at
prices which are higher than the remuneration according to the cost-plus method
or which are to be set higher in accordance with the arm's length principle, a
remuneration in accordance with § 2 shall
be charged to the other enterprises at the time of the first
provision for assets and other advantages previously provided free of charge by
the transferring enterprise for the provision of services; the assets or
other benefits in question shall be deemed to be a transfer package, provided
that the other requirements for this are met.
(5) A transfer of functions
within the meaning of paragraph 2 shall not be deemed to have taken place if
there is no restriction on the exercise of the function in question at the
transferring company within five years of the assumption of the function by the
acquiring company, although the other requirements of paragraph 2, sentence 1
are met (duplication of functions). If such a restriction occurs within this
period, a transfer of functions shall
be deemed to have taken place at the time when the restriction
occurs, unless the taxpayer proves that this restriction is not directly
related to the duplication of functions.
A s s e
s s m e n t 2
W e r t h e T r a n s f
e r p a c e t s
§ 2
Value
of the transfer package
The area of agreement (§ 6) shall be determined taking into account
all circumstances of the individual case on the basis of a function and risk
analysis before and after the relocation of functions, whereby, in addition to
actually existing alternatives for action, location advantages or
disadvantages, synergy effects and tax effects shall be taken into account.
The starting point for the calculations
are the documents that were the basis for the company's decision to carry out a
relocation of functions. For the calculation of the area of agreement, a
capital value-oriented valuation method is to be used. For this purpose, the
expectations of the financial surpluses of the participating companies
corresponding to the standard of section 1, paragraph 1, sentence 3 of the
Foreign Tax Act, appropriate capitalisation interest
rates (section 4) and a capitalisation period dependent on the circumstances
of the exercise of the function (section 5)
shall be taken as a basis.
§ 3
Components of the transfer package
(1) If different agreements
are made for individual parts of the transfer package or if such agreements are
to be assumed in accordance with the arm's length principle, arm's length
prices are to be used for all parts of the transfer package which correspond in
total to the value of the transfer package as a whole determined in
accordance with § 2.
(2) In the cases of section
1, paragraph 2, sentence 3, section 1, paragraph
4 or section 1, paragraph 5, sentence 2, the transfer prices for the business
transactions that have led to a transfer of functions shall be set in
accordance with the arm's length principle in such a way that, together with
the originally determined transfer prices, they correspond
to the value of the transfer package as a whole determined
in accordance with section 2.
§ 4
Capitalisation rate
In order to determine
the appropriate capitalisation interest
rate, the interest rate for a risk-free investment must be used as a basis,
taking into account the principles of equivalence, and a risk-adequate premium
derived from the capital market must be applied.
The term of the
comparable risk-free investment shall be based on how long the function taken
over is expected to be performed. The surcharge shall be calculated in such a
way that it takes into account the circumstances relevant for risk assessment
in comparable cases between unrelated third parties for both the acquiring and
the relocating company.
§ 5
Capitalisation period
If no reasons for a specific capitalisation period depending on the circumstances
of the exercise of the function are proven, an unlimited capitalisation period is to be taken as a basis.
§ 6
Determination
of the area of agreement
(1) For a relocating
enterprise that can expect financial surpluses from the function, the lower
limit of the agreement range (minimum price) within the meaning of section
1(3a) sentence 5 of the Foreign Tax Act results from the compensation for the
elimination or reduction of the financial surpluses plus any closure costs
incurred. The cash value is decisive. Actually existing alternatives for action
that the transferring company would have as a company independent of the
acquiring company shall be taken into account without calling into question the
entrepreneurial disposition authority of the transferring company.
(2) In cases where the
transferring company is no longer able to perform the function itself with its
own resources for legal, factual or economic reasons, the minimum price
corresponds to the liquidation value.
(3) If a company relocates a
function from which it cannot expect any financial surpluses in the long term,
it may be in line with the conduct of a prudent and conscientious manager of
the relocating company to accept, as a minimum price, a payment for the
relocation of the function that only partially covers the closure costs
incurred or to make a compensation payment to the acquiring company for taking
over the source of the losses in order to limit losses.
(4) The cash value of the
expected financial surpluses of the acquiring company from the function taken
over is regularly the upper limit of the income range (maximum price) within
the meaning of section 1(3a) sentence 5 of the Foreign Tax Act. Actually existing
alternative courses of action that the acquiring company would have as a
company independent of the transferring company are to be taken into account
without calling into question the entrepreneurial disposition authority of the
acquiring company.
(5) Also in the cases of
paragraphs 2 and 3, where the minimum price of the relocating company is zero
or below, the arm's length principle shall be applied to examine what price an
independent third party would be willing to pay to take over the function.
§ 7
Claims
for damages, compensation and indemnification
Statutory or contractual claims for
damages, compensation and indemnification, as well as claims that would be
available to unrelated third parties if their alternative courses of action were
contractually or factually excluded, may be taken as a basis for the taxation
of a transfer of functions if the taxpayer can demonstrate that such third
parties would have acted in a comparable manner in similar circumstances. The
taxpayer must also prove that no significant intangible assets or other
benefits have been transferred or made available for use, unless the transfer
or making available is a necessary consequence of claims within the meaning of
sentence 1.
A s s e
s s m e n t 3
S c r i p t i o n s
§ 8
Application to permanent establishment cases
The provisions of this Ordinance shall
apply mutatis mutandis to the extent that, pursuant to section 1(5) of the
Foreign Tax Act, section 1(3b) of the Foreign Tax Act applies to a business
relationship within the meaning of section 1(4) sentence 1 number 2 of the
Foreign Tax Act.
§ 9
Application
instructions
This Ordinance shall apply for the first
time to assessment periods
beginning after the
31 December 2021. The
Regulation on the Relocation of Functions of 12 August 2008 (Federal Law
Gazette I p. 1680), as amended by Article 24 of the Act of 26 June 2013
(Federal Law Gazette I p. 1809), shall apply for the last time to assessment
periods ending before 1 January 2022.
§ 10
Entry into force, expiry
This Ordinance shall
enter into force on the day following its promulgation. At the same time, the
Radio Relocation Ordinance of 12 August 2008 (Federal Law Gazette I p. 1680),
which was amended by Article 24 of the Act of 26 June 2013 (Federal Law Gazette
I p. 1809), shall expire.
The Federal Council
has agreed.
Justification
A. General part
I. Objective and necessity
of the regulations
§ Section 1 (3b) AStG ensures, in accordance with the existing double
taxation agreements and the OECD Transfer Pricing Guidelines, that hidden
reserves from operational functions created in Germany and the related assets
or other benefits are correctly allocated to German taxation when transferred
to associated enterprises abroad.
§ Section 1 (3b) in
conjunction with Section 1 (3) sentence 7 AStG.
In conjunction with Section 1 (3) sentence 7 of the German Income Tax Act (AStG), however, only define the guidelines for the compilation
and valuation of the so-called transfer package and leave the more detailed
definition and questions of business valuation in the sense of a uniform design
to the statutory instrument.
II. Essential content of
the draft
The ordinance is
essentially based on the previous Relocation of Functions Ordinance of 12
August 2008 (Federal Law Gazette I p. 1809), which was repealed by Article 24
of the Act of
26 June 2013 (Federal
Law Gazette I p. 1809). Insofar as provisions of the previous Ordinance were
transferred to Section 1 of the Foreign Tax Act by the Act to Modernise the Relief from Withholding Tax and the
Certification of Capital Gains Tax (Abzugsteuerentlastungsmodernisierungsge- setz - AbzStEntModG) of
2 June 2021 (BGBl. I p. 1259), they are no longer
contained in the new Ordinance; blind references that arose were adjusted.
Linguistic inaccuracies in the previous ordinance have been clarified.
III. Alternatives
None.
IV. Regulatory
competence
The competence of the
Federal Ministry of Finance to issue ordinances follows from section 1(6) AStG.
V. Compatibility with
European Union law and international treaties
The regulations on the
transfer of functions are based on the internationally recognised arm's
length principle, which is also reflected in Art. 9 OECD-MA and the OECD
transfer pricing guidelines, and implement this in national law.
VI. Regulatory
consequences
None.
1. Legal and administrative simplification
The regulations adapt
the existing provisions of the previous FVerlV to
the new version of the law. This closes gaps that have arisen due to the
restructuring of the underlying law. Duplications resulting from the transfer
of provisions of the previous ordinance into the law are eliminated.
2. Sustainability
aspects
The legal ordinance is
in line with the German Sustainability Strategy in that it secures the tax
revenue of the state as a whole. Thus the indicator area
8.2 (Public debt -
consolidate public finances, create intergenerational justice). There is no
sustainability relevance with regard to other indicators.
3. Budgetary expenditure
without compliance costs
None.
4. Compliance
costs
The ordinance does not
lead to any change in the compliance burden for citizens, the economy and the
administration.
5. Further costs
No other direct costs are incurred by the
economy, including small and medium-sized enterprises.
Effects on individual
prices and the price level, especially on the consumer price level, are not to
be expected.
6. Further regulatory consequences
Taking into account the
different life situations of women and men, there are no discernible effects
that run counter to equality policy objectives pursuant to Section 2 of the
Joint Rules of Procedure of the Federal Ministries.
VII. Time limit; evaluation
The regulations are
intended to have a permanent effect, so that a time limit cannot be considered.
Due to the unchanged effects on the annual
compliance expenditure, an evaluation of the regulations is not necessary.
B. Special part
Regarding Section 1 (General Provisions)
Regarding § 1 (General
Provisions)
Re paragraph 1
Paragraph 1 was taken over from the previous version
of the legal ordinance with the same wording and content.
Re paragraph 2
Sentence 1 was adapted
to the new version of section 1 (3b) AStG by the AbzStEntModG of
2 June 2021. Sentence 2,
which has no direct counterpart in the previous version of the statutory
instrument, supplements sentence 1 and clarifies that the function referred to
in section 1(3b) sentence 1 AStG as a
whole, which constitutes the transfer package, includes the function within the
meaning of paragraph 1 that is
transferred or relinquished in whole or in part in accordance with paragraph 2
sentence 1, including the associated opportunities and risks as well as any
assets or other benefits that are also transferred or relinquished. The object
of a transfer of functions is thus the part of an entire function that has been
transferred or relinquished, even if only part of the function of the
transferring enterprise has been transferred. Sentence 3 corresponds to the
previous sentence 3.
Re paragraph 3
The previous paragraph 3
could be omitted because § 1 paragraph 3b sentence 1 AStG now
defines the transfer package. Paragraph 3 now contains the provisions of the
previous paragraph 5, which have been adopted with adjustments to the new
statutory provisions.
Re paragraph 4
Paragraph 4 takes up the
only relevant provision from § 2 of the old statutory instrument due to the
omission of exemptions in § 1 AStG and
transfers the rule example from the previous § 2 paragraph 2 sentence 2 to the
new statutory instrument.
Re paragraph 5
Paragraph 5 essentially
corresponds to the previous paragraph 6.
The previously contained
paragraph 7 could be omitted, since in the cases mentioned there it is also
ensured according to the remaining regulations that a realisation of
relocations of functions does not occur.
Regarding Section 2 (Value of the Transfer
Package) Regarding § 2 (Value
of the Transfer Package)
§ Section 2 takes over
the content of the regulations of the previous Section 1 (4) and Section 3 (2)
and, instead of profit potentials, uses the term "financial
surpluses", which is common in business valuations. The remaining
provisions of the previous § 3 could be omitted, since § 1 paragraph 3a
sentences 5 and 6 AStG already refer to the
area of agreement.
Re §
3 (Components of the transfer
package)
§ Section 3 corresponds
to the previous section 4 with subsequent adjustments, with the exception of
the deletion of the previous paragraph 2, which is no longer needed due to the
lack of concrete regulatory content. The doubtful cases addressed there so far
are reliably regulated by the correct application of the other applicable tax
law.
Re §
4 (Capitalisation rate)
§ Section 4 corresponds
for the most part, with editorial clarifications, to the previous Section 5.
Sentence 3 has been reworded for clarification purposes in order to emphasise that the risk premium to be applied does not
only refer to "customary" (previous version) comparison parameters,
but must have a transaction reference that third parties would also include in
their considerations, so that the risk premium is "customary".
Re § 5 (Capitalisation period)
§ 5 corresponds to the previous § 6.
Re § 6 (Determination of the area of agreement)
§ 6
corresponds to the previous § 7 with subsequent editorial adjustments and
clarifications.
Re § 7 (Claims for damages, compensation
and indemnification)
§ 7 corresponds to the
previous § 8 with subsequent editorial changes.
Regarding Section 3 (Final Provisions)
Re § 8 (Application to permanent establishment cases)
§ Section 8 clarifies
that the regulations on the relocation of functions are also applicable to
transactions between an enterprise and its permanent establishment within the
meaning of section 1(5) sentence 1 of the Foreign Tax Act.
Re §
9 (Application provision)
The new regulation
applies to all completed transactions (relocations of functions) in assessment
periods beginning after 31 December 2021. The previously applicable version of
the Ordinance applies to relocations of functions completed prior to that date.
The Ordinance is thus based on the new version of section 1 of the Foreign Tax
Act by the Withholding Tax Relief Modernisation Act
of 2 June 2021.
Re §
10 (Entry into Force, Expiry)
Article 10 provides that
this Ordinance shall enter into force on the day following its promulgation. At
the same time, the Ordinance on the Relocation of Functions of 12 August 2008
(Federal Law Gazette I p. 1680), which was amended by Article 24 of the Act of
26 June 2013 (Federal Law Gazette I p. 1809), shall expire.