To address the amended German Transfer Pricing (TP) regulations (§1 Sec. 3d and 3e of the German Foreign Tax Act, or AStG), which govern cross-border intragroup financing transactions, the Federal Ministry of Finance (BMF) published the final version of the revised administrative guidelines on December 12, 2024 [1]. These guidelines, known as the German Administrative Principles Governing Transfer Pricing ("new German Administrative Principles"), set forth updated German administrative TP principles. While the administrative principles are binding only on tax authorities, not taxpayers, it presents the German tax administration’s interpretation of the new rules, making them highly relevant for the TP practice in Germany.
 

Key changes in the current version compared to the old one

The new German Administrative Principles consider the Growth Opportunities Act (“Wachstumschancengesetz”), which came into force on 28 March 2024 and brought significant changes to the rules for intercompany financing relationships and -services. Most of the changes have already been addressed in the draft version of the administrative principles published in August 2024 (Cf. A&M: Germany: New Transfer Pricing Rules May Limit Interest Deduction in Inbound Cases, dated 3 October 2024). Further clarifications in implementing the new TP rules in the final version compared to the draft version are described in the section below.

In addition to the financing transactions, the new German Administrative Principles incorporate the Organisation for Economic Co-operation and Development (“OECD”)’s Pillar One- Amount B approach in section 3.63a (Chapter III “G Supplies of goods and services”)[2]. BMF states that the application of OECD Pillar One - Amount B approach is “not objectionable”. Specifically, the new German Administrative Principles include a new Appendix 4 - the final OECD Pillar One - Amount B report and a new Appendix 5 listing the so-called “covered jurisdictions” for the application of Pillar One - Amount B. Basically, the German tax authorities limit the application of this simplified approach to certain countries, only if these countries have a double tax treaty (DTA) with Germany and are not classified as a non-cooperative tax jurisdiction within the meaning of the Tax Haven Defense Act (“Steueroasen-Abwehrgesetz”).

The third major change, outlined in section 3.80, is the repeal of the old "Administrative Principles on Employee Secondments" dated November 9, 2001, through the BMF letter issued on December 12, 2023 [3]. This does not lead to significant practical changes. The updated guidance further emphasizes that the arm’s length principle must be applied in cases of temporary employment.

The new German Administrative Principles are applicable retroactively for tax assessment period 2024 onwards. The Pillar One - Amount B rules (i.e., Sec. 3.63a as well as Appendices 4 and 5) pose an exception and are applicable for tax assessment period 2025 onwards. 
 

Further clarification in the new German Administrative Principles in terms of financing transactions

• The business purpose is considered substantiated, if the funds are used to maintain business operations or to acquire assets. The maintenance of arm's-length liquidity reserves or capital buffers can also be seen as solid business purpose. Note that debt-financed dividend distributions may only be appropriate if they are carried out in line with the company’s common practice (Sec. 3.126 and 3.127).
• In the case of short-term capital transfers, such as cash pools, the borrower's ability to repay the loan can generally be presumed. As a result, a debt capacity analysis is not required for cash pools. For loans where the interest rate is based on investment-grade ratings, the ratings can be used as the evidence for debt capacity, i.e., no separate debt capacity analysis is required either (Sec. 3.129).
• To the extent a loan is re-classified into equity, the associated costs, such as commitment fees, prepayment penalties, or other loan-related expenses, are also non-deductible (Sec. 3.130).
• The new regulation is a “to the extent” adjustment clause: The overall terms and conditions of the loan transaction is decisive for the assessment of the arm’s length nature of the interest rate, and the interest rate can only be amended to the extent they are not arm’s length (Sec. 3.132).
• If the corporate group does not have a credit rating available, an existing credit rating of the ultimate parent company can be used. If the ultimate parent company does not have a credit rating, it may be accepted, for simplification purposes, that a group rating can be determined at the time the loan is granted, based on the financing costs of the corporate group with unrelated third parties (Sec. 3.136).
• A credit analyses prepared by the Deutsche Bundesbank is to be recognized (Sec. 3.136).
• A debt capacity analysis should be performed as of December 31, 2024, for all unchanged loans that remain outstanding after that date. If the terms of existing loans are significantly amended between December 31, 2023, and January 1, 2025, the debt capacity analysis should be conducted on the date the terms are amended. For cash pools, the date of each individual transaction is decisive (Sec. 3.146).

How A&M can help

For recommendations of actions for intragroup financing transactions we refer to our article dated 3 October 2024.

Taxpayers need to stay alert and monitor German transfer pricing compliance practices as they continue to evolve. If you would like to receive more information or discuss the impact of the above, please get in touch with Clemens Petersen and Cheng Qiu.