Transfer pricing in Germany

Policy, trends and developments

Government policy

Describe the general government/regulatory policy for transfer pricing in your jurisdiction. To what extent is the arm’s-length principle followed?

In recent years, German legislation has increasingly focused on transfer pricing and has incorporated the principles outlined by the Organisation for Economic Cooperation and Development (OECD), including many aspects of the OECD Action Plan on Base Erosion and Profit Shifting (BEPS). This has led to a number of amendments to the Foreign Tax Act and the General Fiscal Code (eg, the imposition of higher standards of transfer pricing documentation and the application of the arm’s-length principle with regard to permanent establishments).

The dealing at arm’s-length principle is the core element of the German transfer pricing legislation as outlined in Section 1(1) of the Foreign Tax Act. The arm’s-length principle under the act is applicable to cross-border transactions, including the allocation of profits between headquarters and permanent establishments.

Broadly speaking, the domestic understanding and interpretation of the arm’s-length principle corresponds to the principles outlined in Article 9 of the OECD Model Tax Convention, with some modifications (eg, Section 1(1)3 of the Foreign Tax Act stipulates that for the application of the dealing at arm’s-length principle, it has to be assumed that unrelated parties have complete knowledge of all relevant facts and circumstances of the business transaction (ie, information transparency) and act like prudent and conscientious business managers).

However, following a decision by the Federal Fiscal Court, which interpreted Article 9 of the OECD Model Tax Convention in a specific case in a manner that deviates from the view of the German tax authorities, a change of the Foreign Tax Act was discussed in the political arena in such a way that the dealing at arm’s-length principle under Article 9 of the respective double tax treaty must be interpreted in line with the Foreign Tax Act. Although changes to the act have not yet been implemented, it cannot be entirely ruled out that changes will be implemented in the near future.

The dealing at arm’s-length principle also applies to domestic transactions (eg, as an element for the assessment of hidden profit distributions).

Trends and developments

Have there been any notable recent trends or developments concerning transfer pricing in your jurisdiction, including any regulatory changes or case law?

Recent German tax legislation on transfer pricing has focused on the implementation of the BEPS Action Plan and other OECD principles in domestic tax law. In particular the German legislature introduced country-by-country reporting in 2016 (Section 138a(1) of the General Fiscal Code and Action Item 13 of the BEPS Action Plan) and certain limitations regarding the deductibility of royalty payments and similar expenditures between related parties in 2017 (Section 4j of the Income Tax Act and Action Item 5 of the BEPS Action Plan). Further, the authorised OECD approach regarding the attribution of profits to permanent establishments was implemented in 2014 (Section 1(5) of the Foreign Tax Act) under which permanent establishments are treated as if they were functionally separate entities, which may lead to the recognition of internal dealings with their headquarters.

Legal framework

Domestic legislation and applicability

What primary and secondary legislation governs transfer pricing in your jurisdiction?

The main provision addressing transfer pricing aspects in a cross-border context is Section 1 of the Foreign Tax Act. This provision provides for:

• the application of the arm’s-length principle;
• the definition of ‘related’ parties;
• the method of determining transfer prices; and
• the definition of ‘relevant business relationships’.

In addition, Section 8(3) of the Corporate Income Tax Act, which also applies with respect to domestic transactions, stipulates that hidden profit distributions do not reduce and that hidden contributions do not increase the taxable profits of a corporate entity. The act does not specify which requirements must be satisfied in order to assume a hidden profit distribution or the requirements for the assumption for a hidden contribution. However, the fiscal courts have elaborated generally accepted principles and requirements for the assumption of hidden profit distributions and contributions. For example, the requirements of a hidden profit distribution are, generally speaking, fulfilled based on the jurisdiction of the fiscal courts if an economic loss is suffered or a profit is not realised by a corporate entity provided that:

• such economic disadvantage is caused by the relationship to a shareholder;
• it influences the profit of the corporate entity for tax purposes; and
• it is not based on or related to a regular profit distribution.

Such an economic disadvantage is regularly caused by the shareholder relationship if a prudent and conscientious business manager would not have accepted such economic disadvantage vis-a-vis a third party which is not shareholder of the corporate entity (dealing at arm’s-length principle). In this context, it is important that based on the jurisdiction of the fiscal court, the granting of advantages by the corporate entity to its sister company usually leads to a hidden profit distribution up the company chain to the first common parent and could lead to a hidden contribution down the corporate chain from the common parent to the receiving sister company.

The aforementioned provisions dealing with the arm’s-length principle are accompanied by Section 90(3) of the General Fiscal Code, which deals with the general documentation requirements in connection with transfer pricing and Section 138a of the code, which imposes country-by-country reporting obligations on certain companies.

Secondary legislation complements the aforementioned provisions and provides additional details. In the area of transfer pricing these include:

• the Ordinance on the Kind, Content and Extent of the Documentation within the meaning of Section 90(3) of the General Fiscal Code, which was re-issued in 2017 to include the requirements for country-by-country reporting;
• the Ordinance on the Allocation of Profits between a Business and its Foreign Permanent Establishment; and
• the 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 transfer of functions.

Finally, the Federal Ministry of Finance has issued a number of circulars addressing transfer pricing, which cover in particular:

·the principles for auditing the profit allocation between related persons with cross-border transactions concerning the  

·duties of determination and cooperation,

adjustments of income and

• mutual agreement and arbitration procedures (administrative principles – procedures);
• the principles for auditing the allocation of profits of permanent establishments of international enterprises (permanent establishment administrative principles); and
• the principles for auditing the profit allocation between related persons in cases of cross-border transfer of function (administrative principles – transfer of function).

These circulars outline the interpretation of the relevant provisions by the tax authorities and are binding for the tax administration at a federal and local level, but are not binding for the taxpayer or as a rule, the fiscal courts.

Are there any industry-specific transfer pricing regulations?

German tax law does not provide for statutory transfer pricing regulations which are specific to certain industries. However, industry-specific aspects (eg, for banks) are addressed in circulars issued by the Federal Ministry of Finance.

What transactions are subject to transfer pricing rules?

A ‘relevant business relationship’ for the application of the arm’s-length principle under the Foreign Tax Act is defined as a single or multiple business transactions between the taxpayer and a related party which:

• forms part of the taxpayer’s activities leading to business or commercial income, letting and leasing income or would lead to such income if the respective business transaction would be carried out in Germany between a German taxpayer and a German related party; and
• is not based on an agreement which directly results in a legal amendment of the relevant articles of association.

In addition, the Foreign Tax Act also applies to business transactions between a taxpayer’s enterprise and its foreign permanent establishment, which are deemed to be contractual relationships. There is no specific limitation to certain kinds of transactions with regard to the application of Section 8(3) of the Corporate Income Tax Act.

Specific provisions apply with respect to the cross-border transfer of functions (business restructurings). The rules on the taxation of such cross-border transfer of functions (under Section 1(3) of the Foreign Tax Act) were introduced in 2008.

How are ‘related/associated parties’ legally defined for transfer pricing purposes?

Pursuant to Section 1(2) of the Foreign Tax Act, a party is ‘related’ to a taxpayer if:

• the party has a direct or indirect participation with the taxpayer amounting to at least 25% (substantial participation) or can directly or indirectly exercise a controlling influence over the taxpayer;
• the taxpayer has a substantial participation with the relevant party or can exercise a direct or indirect controlling influence over such party;
• a third party has a substantial participation in both the taxpayer and such other party or the third party can exercise on both the taxpayer and such other party a direct or indirect controlling influence; or
• the party or the taxpayer can exercise an influence which originates outside of the relevant business relationship when agreeing the terms and conditions of a respective business relationship or if one of them has an interest in the generation of income by the other person.

Are any safe harbours available?

German tax law provides no safe harbour rules in connection with transfer pricing and the tax authorities do not apply safe harbour rules.

Regulators

Which government bodies regulate transfer pricing and what is the extent of their powers?

There is no government body which specifically regulates transfer pricing. Therefore, laws in connection with transfer pricing are part of the general tax legislation which is passed on a federal level only. The administration and collection of tax is the responsibility of federal states. The tax authorities (mainly the Federal Ministry of Finance) issue circulars outlining their interpretation of relevant tax law which are binding for the tax administration at a local and federal level, but are not binding for the taxpayer or as a rule, for the fiscal courts.

International agreements

Which international transfer pricing agreements has your jurisdiction signed?

Germany is not a signatory of specific international transfer pricing agreements. However, Germany has concluded double tax treaties with most developed countries, which usually contain a provision comparable to Article 9 of the Organisation for Economic Cooperation and Development (OECD) Model Tax Convention.

To what extent does your jurisdiction follow the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines?

Although the OECD Transfer Pricing Guidelines are not applied directly in Germany, the guidelines have a substantial influence on legislation regarding transfer pricing and the German government has been implementing the OECD Transfer Pricing Guidelines in tax law. This particularly applies for the use of transfer pricing methods. Although there are still some differences between the OECD Transfer Pricing Guidelines and the transfer pricing legislation and its interpretation in Germany (eg, regarding the treatment of transfer of function), the main principles of the guidelines are applied in German transfer pricing practice.

Transfer pricing methods

Available methods

Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?

In general, the transfer pricing methods used to establish the arm’s-length price are not restricted, although the tax authorities prefer the transaction-based methods. In addition to the transaction-based methods (ie, comparison method, resale price method and cost-plus method), the transactional net margin method and the profit split method can be used, depending on the circumstances of the case (in particular, if no comparable cases are available). The pros and cons of these transfer pricing methods generally apply without German specifics.

Preferred methods and restrictions

Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?

According to Section 1(3) of the Foreign Tax Act, the price comparison method, the resale price method or the cost-plus method must be preferentially applied if arm’s-length prices can be determined which are – after appropriate adjustments in view of the performed functions, used assets and assumed chances and risks – unrestrictedly comparable for such methods.

If such arm’s-length prices cannot be determined, the application of an appropriate transfer pricing method may be based on arm’s-length prices which are restrictedly comparable and have been adjusted appropriately. If arm’s-length prices which are restrictedly comparable cannot be determined, a hypothetical comparison based on the principles outlined in Section 1(3) of the Foreign Tax Act has to be applied by the taxpayer.

Comparability analysis

What rules, standards and best practices should be considered when undertaking a comparability analysis?

In addition to the rules, standards and best practices generally used to determine transfer prices by using internationally accepted transfer pricing methods, the Ordinance on the Kind, Content and Extent of the Documentation within the meaning of Section 90(3) of the General Fiscal Code stipulates that if a taxpayer uses databases for the determination of transfer prices, the taxpayer must fully disclose:

• the applied search strategy;
• the applied search criteria;
• the search results; and
• the selection process.

The entire search process must be comprehensible and testable at the time of the tax audit. The configuration of the database, used for the search process, must be fully documented.

Special considerations

Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?

The hierarchy of methods must be respected. Within these limits, a taxpayer may use the method appropriate for the relevant business transaction.

Documentation and reporting

Rules and procedures

What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?

A taxpayer is not obliged to file transfer pricing documentation on a regular basis with the tax authorities, in particular there is no obligation to submit transfer pricing documentation with an annual tax return.

Section 90(3) of the General Fiscal Code stipulates that a taxpayer has a general obligation to prepare documentation on his or her relevant business relationships in terms of the Foreign Tax Act. However, there is no obligation to prepare transfer pricing documentation for all cross-border business transactions on an ongoing basis, this only applies with respect to exceptional business transactions (eg, business restructurings and the transfer of risks and functions). The transfer pricing documentation must be prepared in a timely manner (which is assumed in case of preparation within six months from the end of the fiscal year in which the business transaction took place).

Although there is no obligation to prepare transfer pricing documentation for all cross-border business transactions on an ongoing basis, tax authorities can request in a tax audit transfer pricing documentation which must be prepared in line with Section 90(3) of the General Fiscal Code and the Ordinance on the Kind, Content and Extent of the Documentation within the meaning of Section 90(3) of the General Fiscal Code. Such transfer pricing documentation must be provided within 60 days after the respective request has been received. In case of exceptional business transactions, the transfer pricing documentation must be provided to the tax authorities within a reduced 30-day timeframe after the respective request has been received by the taxpayer. In principle, it is possible to extend the relevant deadlines based on the facts and circumstances of each individual case.

Content requirements

What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?

Based on the Ordinance on the Kind, Content and Extent of the Documentation within the meaning of Section 90(3) of the General Fiscal Code, the transfer pricing documentation, in principle, must provide the following information (local file), but the kind, content and extent of the transfer pricing documentation to be prepared must be determined on the basis of the circumstances of the individual case taking the applied transfer pricing method into account:  

• general information on the corporate shareholder structure, business operations and the operational structure, including a description of:
  • the corporate structure between the taxpayer and the related party;
  • the organisational and operational group structure; and
  • the management structure;
• details of the business transaction between the taxpayer and the related party, including:
  • a description of the relevant business transaction; and
  • a list of the material intangible assets which are owned by the taxpayer and used in the course of the relevant business transaction;
• a functional and risk analysis, including a description of:
  • the performed functions;
  • the risks assumed and material assets deployed;
  • the material terms and conditions of the contractual relationship;
  • the value chain; and
• a transfer price analysis, including:
  • a description of the applied transfer pricing method;
  • the reasoning for the election of the applied transfer pricing method;
  • records regarding the calculation used in connection with the application of the relevant transfer pricing method;
  • the date on which transfer prices were established; and
  • information relevant to the establishment of relevant transfer prices at that time.

In addition to the local file, companies which are part of a multinational group must prepare a master file if the company turnover in the preceding fiscal year was over €100 million. A ‘multinational group’ is defined as at least two related companies located in two different countries or at least a company with at least one permanent establishment in a different country. The master file must contain an overview of global business activities of the multinational group as well as the applied systematics regarding the determination of transfer prices.

Transfer pricing documentation must be prepared in written or electronic form. Pursuant to Section 2(1)3 of the Ordinance on the Kind, Content and Extent of the Documentation within the meaning of Section 90(3) of the General Fiscal Code, the transfer pricing documentation must document the taxpayer’s serious efforts to arrange his or her business transactions with related parties in compliance with the dealing at arm’s-length principle. Thus, the transfer pricing documentation must enable a qualified third party within a reasonable timeframe to assess if and to what extent the arm’s-length principle has been observed.

Additionally, pursuant to Section 138a of the General Fiscal Code, country-by-country reporting is mandatory for companies resident for tax purposes in Germany, which establish consolidated group accounts or must establish consolidated group accounts other than for tax purposes if and to the extent that a subsidiary resident for tax purposes outside of Germany or a foreign permanent establishment is included in the consolidated group accounts and the total consolidated turnover as shown in the consolidated group accounts in the preceding fiscal year amounts to at least €750 million. The country-by-country reporting must be submitted to the Federal Central Tax Office as set out in Section 138a(2) of the General Fiscal Code and no later than one year after the end of the fiscal year for which the country-by-country report must be prepared. If a company is resident in Germany and is part of a foreign multinational group, it is generally neither obliged to prepare nor file a country-by-country report for the foreign multinational group in Germany. However, this does not apply if the parent company of the foreign multinational group requests the German company to file the country-by-country report for the group with the German Federal Central Tax Office or if specific cooperation obligations apply as the German Federal Central Tax Office has not been provided the foreign group’s country-by-country report.

Penalties

What are the penalties for non-compliance with documentation and reporting requirements?

Section 162(4) of the General Fiscal Code stipulates that a minimum penalty of €5,000 applies if a taxpayer does not provide transfer pricing documentation as defined under Section 90(3) of the code or if the provided transfer pricing documentation is essentially of no use. The penalty must be at least 5% and at most 10% of the additional income arising from required corrections, including estimates by the tax authorities due to the failure by the taxpayer to comply with his or her cooperation obligations pursuant to Section 90(3) of the General Fiscal Code if this amount exceeds €5,000. Moreover, if sufficient transfer pricing documentation is submitted but it is late, a fine of at least €100 applies for each full day of delay and may amount up to €1 million.

In addition to the penalties set out above, if a taxpayer fails to comply with his or her cooperation obligations pursuant to Section 90(3) of the General Fiscal Code by not submitting the relevant documentation or by submitting documentation which is essentially of no use or where exceptional business transactions have not been documented in a timely manner, unless demonstrated otherwise it will be assumed that the domestic income of the taxpayer to which the respective transfer pricing documentation relates is higher than the income declared. If the tax authorities have to conduct an estimate and the relevant income can only be determined within a certain range (in particular a price range), the authorities may use the upper end of the relevant range to the detriment of the taxpayer.

Finally, taxpayers can be fined between €2,500 to €250,000 if certain documents requested in the course of a tax audit are not provided within a reasonable timeframe.

The failure to submit the country-by-country report may qualify as an administrative offence and can result in fines.

Best practices

What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?

It may be advisable to prepare transfer pricing documentation in connection with the notification by the tax authorities of a general tax audit, as the 60-day timeframe may not be sufficient. In any event, it is recommended that the relevant data for a fiscal year forming the basis of the relevant documentation is collected in a timely manner even though the transfer pricing documentation does not have to be prepared on an annual basis, as data collection in connection with a tax audit, which is only carried out several years after the relevant fiscal year ends, is often difficult.

Advance pricing agreements

Availability and eligibility

Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?

Yes, advance pricing agreements (APA) with tax authorities are typically bilateral but can sometimes be multilateral.

Generally speaking, APAs are available to taxpayers protected by a respective double tax treaty and in particular with respect to transfer pricing issues (eg, royalty fees, tolling fees and the remuneration of a commission). The applicant must have a legitimate interest in the APA.

Rules and procedures

What rules and procedures apply to advance pricing agreements?

The requirements and procedure regarding the application for an APA are outlined in detail in an explanatory note published by the Federal Ministry of Finance in 2006. The APA process usually starts with a preliminary meeting (ie, a pre-filing meeting) between the Federal Central Tax Office which is responsible for the negotiations with the other contracting country, the federal and state auditors as well as the taxpayer. In the course of the pre-filing the following aspects are discussed:

• whether the case is suitable for an APA;
• what the scope of the APA might be; and
• what information and documentation must be provided in the course of the application.

The explanatory note contains a detailed list of information and documents to be included in the application. Four copies of the application must be submitted in written form to the Federal Central Tax Office.

An APA with the German tax authorities usually becomes legally effective only if the taxpayer agrees with the APA and waives his or her rights to appeal against tax assessments to the extent that such tax assessments comply with the agreement set out in the APA. After the APA has become effective and on application by the taxpayer, the local tax office must grant a binding ruling reflecting the agreement reached in the APA.

Timeframes

How long does it typically take to conclude an advance pricing agreement?

The timeframe for the conclusion of an APA cannot be predicted and depends on the complexity of the case. It usually takes between two to four years to conclude an APA, in some cases an APA can become effective after the period which was covered by the application.

What is the typical duration of an advance pricing agreement?

The tax authorities suggest a duration of at least three years and maximum of five years. Under certain conditions, a roll-back into preceding fiscal years is possible.

Fees

What fees apply to requests for advance pricing agreements?

Generally, the following fees apply:

• €20,000 for an APA application;
• €15,000 for an extension; and
• €10,000 for the amendment of an APA.

Fees are reduced for smaller enterprises to:

• €10,000 for an APA application;
• €7,500 Euro for an extension; and
• €5,000 for the amendment of an APA

and may in exceptional situations be reduced to zero.

Special considerations

Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?

It should be kept in mind that comprehensive information and documentation must be provided in the course of the APA process and that this process takes a significant amount of time and may tie up internal and external resources.

Review and adjustments

Review and audit

What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?

Taxpayer compliance with transfer pricing rules are regularly reviewed in the course of general tax audits which usually cover three to four years. Tax audits are conducted by local tax authorities which often have tax inspectors who specialise in transfer pricing. In addition, there are federal auditors who specialise in transfer pricing, some of whom have industry specialisms and may decide to participate in a tax audit. A tax audit involving local and federal tax auditors on transfer pricing can last for many years.

A taxpayer will be notified several weeks in advance of a tax audit. The audit will usually be concluded by a final meeting between the auditors and the taxpayer, in which the results of the audit will be discussed and an agreement sought for any outstanding issues. The results of the audit will be summarised in a written audit report, which can be commented by the taxpayer before it is sent to the tax inspector responsible for the issuance of revised tax assessment notices reflecting the audit’s results.

The burden of proof regarding compliance with the arm’s-length principle lies with the tax authorities, which need to prove the facts and circumstances which lead to a higher tax liability. However, if the taxpayer has not complied with his or her duty of cooperation, the standards for providing proof for an adjustment of the tax liability of the taxpayer are lowered. Further, in cases where the taxpayer does not comply with the relevant documentation requirements, the tax authorities may either estimate the appropriate transfer price or choose the least favourable value within the relevant range.

Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?

There are no specific transfer pricing audits and, therefore, no specific rules in this respect. Transfer pricing aspects are reviewed in the course of general tax audits.

Penalties

What penalties may be imposed for non-compliance with transfer pricing rules?

There is no specific penalty for non-compliance with the transfer pricing rules other than those which apply for non-compliance with the documentation requirements.

However, the interest rate in Germany for tax liabilities which are later assessed amounts to 6% per annum. Interest starts 15 months after the calendar year in which the relevant tax liability arose. The interest paid to the tax authorities is a non-deductible expense.

Adjustments

What rules and restrictions govern transfer pricing adjustments by the tax authorities?

There are no specific restrictions regarding the adjustments by the tax authorities relating to transfer pricing, but the authorities can only adjust the transfer pricing by a taxpayer within the limits described above.

Challenge

How can parties challenge adjustment decisions by the tax authorities?

If no agreement can be reached between the taxpayer and the tax authorities, the taxpayer can file an appeal with the tax authorities against the relevant tax assessment notice containing the transfer pricing adjustment. Such an appeal is filed with the same tax office competent for the tax assessment and the entire case is then reviewed by the tax office.

If and to the extent an appeal is unsuccessful, the decision can be contested by filing a lawsuit with the lower fiscal court of the respective federal state. The fiscal court reviews and assesses all aspects of the case. It is not possible to limit the lawsuit to a certain legal question or certain amount and the fiscal court is not obliged to assess the case based only on the arguments and facts presented by the taxpayer and the tax office.

If and to the extent a party is unsuccessful in fiscal court proceedings, he or she can file an appeal against the fiscal court’s decision with the Federal Fiscal Court. However, strict requirements apply for filing a federal appeal and the scope of the review by the Federal Fiscal Court is limited.

Mutual agreement procedures

What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?

Most of the double tax treaties concluded by the Federal Republic of Germany contain provisions regarding mutual agreement procedures (MAPs) and often arbitration provisions. Germany is also a party to the Multilateral Instrument and the double tax treaties nominated by Germany must be amended in line with the provisions regarding MAPs and arbitration in line with the provisions of the Multilateral Instrument.

A taxpayer can apply for the start of an MAP with his or her local tax authorities or the Federal Central Tax Office under the applicable double tax treaty. The double tax treaty may provide for a certain timeframe in which the application for the initiation of a MAP must be submitted. With the application, the taxpayer must provide detailed information about the underlying facts and the respective tax assessments. Details of the scope, content and procedure regarding a MAP or arbitration involving the tax authorities are outlined in explanatory notes published by the Federal Ministry of Finance in 2006.

The agreement reached in a MAP can only be implemented and result in amended tax assessments if the taxpayer has consented in writing and waived his or her right to appeal against tax assessments, which correctly implement the agreement reached in the MAP or the results of the arbitration.

A MAP is free of charge for the taxpayer, except for his or her own costs and expenses.

Anti-avoidance framework

Regulation

What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?

German tax law already included numerous provisions to combat tax avoidance schemes before the implementation of measures under the Base Erosion and Profit Shift (BEPS) Action Plan. In addition to the general anti-avoidance provision (Section 42 of the General Fiscal Code), there are a significant number of provisions addressing specific situations leading to tax avoidance (eg, anti-treaty shopping provisions, subject to tax provisions and provisions to avoid white income).

To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?

Germany has already implemented a significant number of measures under the BEPS Action Plan.

Is there a legal distinction between aggressive tax planning and tax avoidance?

The term ‘aggressive tax planning’ is not recognised in German law and therefore, only activities which are categorised as tax avoidance under the applicable anti-avoidance rules are covered by German tax law. However, there is an ongoing discussion to amend the law to stipulate under which circumstances tax planning must be disclosed to the tax authorities.

Penalties

What penalties are imposed for non-compliance with anti-avoidance provisions?

There are no specific penalties for any non-compliance with anti-avoidance provisions, but the general penalties, interest and surcharge apply with respect to taxes assessed which deviate from the tax declaration submitted by the taxpayer. Further fines and penalties apply in the case of tax evasion.