Germany

If a parent holds more than 50% of the voting rights in a subsidiary having its place of management in Germany, the two may conclude a formal court-registered profit and loss pooling agreement (PLPA), which must be concluded for a period of at least five years. If certain conditions are fulfilled, the ensuing relationship is referred to as an Organschaft. Effectively, the annual results of an Organschaft are pooled at the level of the parent. The tax group subsidiary itself is only subject to tax with respect to 20/17 of the compensation payments made to outside minority shareholders, if applicable. Profits and losses within a group can therefore be offset, but there is no provision for the elimination of intra-group profits from the total tax base. It should also be noted that negative income of the parent or of the subsidiary incurred within an Organschaft is excluded from offset in the same or another year if a foreign country takes it into account in the taxation of an Organschaft member, or of any other entity.

The main conditions for a tax group for corporate tax/trade tax purposes are:

• The subsidiary is financially integrated; in effect, the parent must have held the shares in the subsidiary without interruption from the beginning of its business year sufficient to give it a majority of the voting rights in the subsidiary.
• The parent of an Organschaft must be an individual, a trading partnership, or a non-tax-exempt corporation, association, or estate.
• The investment in the subsidiary must, from a functional point of view, be attributable to a German branch of the parent, and the income of the branch must be subject to German tax and not be exempt under a DTT.
• The subsidiary must be a corporation having its place of management in Germany and its registered seat in an EU/EEA member state.
• The parent and the subsidiary must have concluded a qualifying profit and loss pooling agreement (PLPA) to run for at least five years and be consistently applied throughout the term of the agreement. Under the PLPA, the subsidiary surrenders its entire income to the parent. Conversely, the parent is obligated to compensate the losses incurred by the subsidiary throughout the term of the agreement.

Transfer pricing

Extensive rules on transfer pricing in respect of all transactions with foreign-related parties are in force. The basic principle is that all cross-border inter-company business transactions should be priced at arm's length. Failure to meet the extensive documentation requirements applicable exposes the company to serious risk of penalties as well as unfavourable estimates by the tax authorities, who have the right to exercise every possible leeway or margin to the taxpayer's disadvantage.

Germany has adjusted its transfer pricing documentation rules to meet the recommendations of the OECD BEPS Project. The taxpayer has to prepare documentation specific to the country and each business (local file) as well as a master file with information regarding the global business operations of the group. Furthermore, a so-called country-by-country reporting (CbCR) must be prepared if the group's revenues exceed EUR 750 million and has to be submitted within one year after the end of the respective business year.

Until 31 December 2024, it was not a requirement for the documentation (local file and master file) to be set up at the time of transaction nor during the course of the tax return process; it was only necessary for the taxpayer to provide the relevant documentation upon request during a tax audit. However, in case of extraordinary business transactions (e.g. restructurings, cost sharing, other material long-term agreements), it was a requirement that documentation had to be prepared within six months after the end of the business year in which the business transaction occurred (but again, it only had to be provided upon request during a tax audit).

Starting 1 January 2025, the tax authorities may request the submission of transfer pricing documentation at any time in the future. Additionally, the transaction matrix, the master file and documentation for extraordinary business transactions (contemporaneous preparation still a requirement) must now be submitted unsolicited within a period of 30 days from the start of a tax audit, i.e., upon receipt of the notification of a tax audit. The Local File needs to be submitted only upon a separate request of the tax authorities within a period of 30 days.  

The Fourth Bureaucracy Relief Act (“Viertes Bürokratieentlastungsgesetz”) published on October 29, 2024, has added an additional component to the record-keeping requirements of Section 90 (3) General Tax Code: namely, the transaction matrix as an "overview of business transactions". An ordinance will clarify the necessary content. The explanatory memorandum to the Fourth Bureaucracy Relief Act provides initial indications in this regard. According to this, it can be assumed that the documentation for the transaction matrix must contain the following elements: subject matter and nature of the transactions, parties involved in the business transactions (with identification of the service provider or recipient), volume and consideration of business transactions, contractual basis, transfer pricing method applied, tax jurisdictions concerned, indication of whether transactions are subject to standard taxation in the relevant tax jurisdiction. On 9 June 2021, the Act on the Modernization of the Relief from and the Certification of Withholding Taxes (Gesetz zur Modernisierung der Entlastung von Abzugsteuern und der Bescheinigung von Kapitalertragsteuer - AbzStEntlModG) came into force. The Act contained amendments or supplements to the Foreign Taxes Act (FTA - Außensteuergesetz) and the General Tax Code (AO) that are also relevant from a transfer pricing perspective.  

The Act addresses key contents of BEPS action points 8-10 ("Aligning Transfer Pricing Outcomes with Value Creation"). For example, the Act contains a comprehensive revision and new version of Section 1 of the German Foreign Taxes Act (FTA - Außensteuergesetz) and emphasizes, among other things, the substance over form approach envisaged by the OECD and the application of the OECD "DEMPE" concept in the context of intangibles. It should be mentioned that the German tax authorities assume that the DEMPE concept should also be applied to German transfer regulations prior to the implementation of the Act: The revised version of Section 1 FTA is only intended to clarify this. 

The Growth Opportunities Act (‘Wachstumschancengesetz’) of 27 March 2024 introduced a new Section 1 (3d) Foreign Taxes Act (FTA) and a new Section 1 (3e) FTA. According to Section 1 (3d) FTA the interest deduction is to be restricted to a so-called group interest rate. The regulation contains a rebuttal option that requires proof that a rate calculated from the corporate group rating complies with the arm's length principle. The group interest rate is the rate at which the corporate group could finance itself vis-à-vis third parties based on the rating calculated for the corporate group. This limitation should apply to interest expenses from cross-border financing within multinational groups of companies.  

Alongside the group interest rate limitation, Section 1 (3d) FTA provides for the introduction of higher evidentiary obligations regarding the loan relationships concerned, e.g. with respect to the ability to service the debt and the necessity of the debt for the business perspective.  

According to the new Section 1 (3e) FTA, it is a rebuttable presumption that the brokering or transfer of funds within a multinational group of companies is a low-function and low-risk service which can only be remunerated on a cost-plus basis. The regulation is also intended to cover cases in which one company in the group is responsible for managing the financial resources - such as liquidity management, financial risk management, currency risk management or acting as a financing company - on behalf of one or more companies in the group. 

The new provisions in section 1 (3d) and (3e) FTA are to apply from the period of assessment 2024. For expenses incurred up to December 31, 2024, the Finance Act 2024 of December 5, 2024 stipulates that Section 1(3d) FTA does not apply if the expenses are based on financing relationships that were agreed under civil law before January 1, 2024 and whose actual implementation began before January 1, 2024. 

Thin capitalisation

There are no thin capitalisation rules as such; their substitute is the 'interest limitation' of, basically, 30% of EBITDA discussed in the Deductions section.

Controlled foreign companies (CFCs)

Pursuant to the German CFC taxation rules regulated in the Foreign Tax Act (FTA - Außensteuergesetz), certain low-taxed (i.e. a rate of less than 15%, or 25% for passive income of a business year of the intermediate company ending prior to 1 January 2024) income, referred to as passive income generated by a CFC, is subject to German tax at the level of the German shareholder, provided the CFC is deemed to be a so-called intermediate company (Zwischengesellschaft) and the German ownership criterion is fulfilled.

Passive income generated by a CFC that qualifies as an intermediate company will be attributed to the German shareholder regardless of whether the income is actually distributed or not (CFC income). The CFC income is subject to German corporation tax and trade tax.

EU/EEA subsidiaries will not be qualified as an intermediate company if a so-called motive test is fulfilled (i.e. the German shareholders prove that the specific income is derived from a substantial economic activity performed in the state of residence of the CFC).

According to the so-called Tax Haven Defence Act (Steueroasenabwehrgesetz, see Tax Haven Defence Act in the Other issues section), CFC taxation may also apply to the entire income (including active income and income for which the motive test is fulfilled) of an intermediate company if the intermediate company is resident in a non-cooperative tax jurisdiction.