Germany

Market overview

Transfer pricing remains a major issue for taxpayers and advisers in Germany. The impact of BEPS measures continues to reverberate and is likely to do so for a long time to come. The implementation of country-by-country reporting (CbCR), public CbCR and the EU automatic information exchange are just a few instances of this.

As a result, the demand for TP advice continues to rise as the tax authorities are more alert and taxpayers are becoming more aware of their obligations. It is no wonder that this has kept TP specialists busy.

The German economy is still stable and the market has not been surprised by any sudden legislative changes. Instead, the picture is one of continuity, with the market adjusting to the new standards and the authorities taking a more vigilant stance.

"The most important development in the market are the BEPS-induced changes and their implementation in German law," KPMG's head of transfer pricing Achim Roeder said. "[Action Point 13] is creating significant demand for one-time activity to adapt taxpayers' documentation content and processes to the new rules."

"We are expecting changes and additional guidance for a number of areas, most notably documentation and debt pricing. Although we would expect evolutionary rather than revolutionary developments," Roeder said.

Much like in neighbouring countries, the German tax authorities have become much more pro-active in their focus on TP audits and have expanded the number of auditors to do so. This has led to a sustained increase in compliance work and a decline in aggressive tax planning and optimisation. These trends are set to continue for at least the next few years.

There is a broad consensus that the German federal elections in September 2017 will not produce a defeat for Angela Merkel and the Christian Democratic Union (CDU) and the Christian Social Union (CSU). Even though Martin Schulz and the Social Democratic Party (SPD) experienced a surge in the polls earlier this year, the results of the regional elections suggest that the so-called 'Schulz effect' has not produced meaningful gains for the SPD.

If the Free Democrats (FDP) succeed the SPD as coalition partners to the Christian Democrats, the bargaining chip could be tax cuts. Chancellor Merkel has pledged a tax break which will save German taxpayers €15 billion ($17.3 billion) a year. But the FDP has pledged €30 billion in tax cuts over a four year period. However, the main spotlight in this election is on questions around refugees and migration, while the trade surplus and eurozone reform are the leading economic questions.

There are good reasons why TP practitioners don't think the next government will substantially change tax and TP policy to the point where the growth of auditing slows down. This is even if the federal elections produce a shock result.

"I don't see a lot of changes coming out of the election even if the SPD won," NERA Consulting's partner Alexander Voegele said. "For example, Bavaria and Baden-Württemberg are traditionally conservative regions, with the CSU in the former and the CDU and the Greens in the latter. This is also where there are a large number of field auditors: 40-50 in Bavaria and maybe 100 in Baden-Württemberg."

Given the federal structure of the German tax system, events in Berlin may matter less than what happens in the tax administration itself, which is based in Bonn, and this remains the case even if the composition of the federal government changes drastically. This means Germany is likely to stay on the same track for the foreseeable future.


Tax authorities

Bundesministerium der Finanzen – Federal Ministry of Finance
Wilhelmstraße 97, 10117 Berlin
Postanschrift: 11016 Berlin
Tel: +49 3 018 682 0
Fax: +49 3 018 682 32 60
Website: www.bundesfinanzministerium.de

Bundeszentralamt für Steuern – Federal Central Tax Office
An der Kueppe 1, 53225 Bonn
Tel: +49 228 406 1240
Fax: +49 228 406 3200
Website: www.bzst.de


Tax rates at a glance

(As of July 2017)

Corporate tax rate 15% (a)
Capital gains 15% (a)
Branch tax 15% (a)
 
Witholding tax
Dividends 25% (a)(b)(c)(d)
Interest 0% (e)(f)
Royalties 15% (a)(b)(f)(g)(h)
 
Net operating losses (years)
Carryback 1 (i)
Carryforward unrestricted (j)

  1. A 5.5% solidarity surcharge is imposed.
  2. On application, these rates may be reduced by tax treaties.
  3. This withholding tax applies to dividends paid to residents and non-residents. Under the 2009 Annual Tax Act, for dividends paid to non-resident corporate entities, this rate may be reduced to 15% if the non-resident dividend recipient qualifies as an eligible recipient under the German anti-treaty shopping rules.
  4. These rates may be reduced under the EU Parent-Subsidiary Directive. Under the EU Parent-Subsidiary Directive, on application, a withholding tax rate of 0% applies to dividends distributed by a German subsidiary to an EU parent company if the recipient has owned 10% or more of the share capital of the subsidiary for a continuous period of 12 months at the time the dividend distribution takes place and if the German anti-treaty shopping rules do not apply.
  5. A 25% interest withholding tax is imposed on the following types of interest:
    • Interest paid by financial institutions. The rate is 15% if the loan is not recorded in a public debt register.
    • Interest from over-the-counter business. Over-the-counter business refers to bank transactions carried out over the bank counter, without the securities being on deposit at the bank.
    • Interest from certain types of profit-participating and convertible debt instruments.
    • The interest withholding tax is not imposed on intercompany loans. Non-residents may apply for a refund of the withholding tax if a treaty exemption applies. If a non-resident is required to file an income tax return in Germany, the withholding tax is credited against the assessed corporate income tax or refunded.
  6. These rates may be reduced by tax treaties or under the EU Interest-Royalty Directive. Under the EU Interest-Royalty Directive, on application, German withholding tax is not imposed on interest and royalties paid by a German resident company to an associated company located in another EU member state. To qualify as associated companies, a minimum 25% shareholding or a common parent is required, among other requirements.
  7. The withholding tax rate on royalties from patents, know-how and similar items is 15% for payments to nonresident corporations if such items are registered in Germany or used in a German permanent establishment.
  8. This withholding tax applies to payments to non-residents only.
  9. The loss carryback, which is optional, is available for corporate income tax purposes, but not for trade income tax purposes. The maximum carryback is €1 million ($1.1 million).
  10. The carryforward applies for both corporate income tax and trade tax purposes. Effective for tax years ending after December 31 2003, the maximum loss carryforward that may be used for corporate and trade tax purposes is restricted to €1 million for each tax year plus 60% of annual taxable income more than €1 million (so-called minimum taxation). The carryforward is subject to the change-of-ownership rule.

Source: EY 2016 Worldwide Corporate Tax Guide


Firm contact details

Deloitte
EY
Flick Gocke Schaumburg, Taxand Germany
KPMG
NERA Economic Consulting
PwC
WTS Germany