22.04.2024 German Tax and Legal News
The business tax reform bill (“Growth Opportunity Act”) (see GTLN dated 03/27/24), which was signed by the president and published in the federal gazette on 27 March 2024, has tightened the transfer pricing rules in the Foreign Tax Act (FTA) regarding cross-border intercompany financing arrangements. The final version of the bill no longer includes the maximum interest barrier rule (see GTLN dated 10/17/23), although such rule was in the original draft bill that was introduced into the legislative process by the government (see GTLN dated 09/04/23). The newly introduced sections 1 (3d) and (3e) FTA are similar to certain transfer pricing rules that were proposed at the end of 2019 in the first draft of the EU anti-tax avoidance directive (ATAD) implementation law (see GTLN dated 12/12/19) but were not implemented at that time.
This article provides an overview of these new transfer pricing rules for cross-border intercompany financing arrangements, which include a three-prong test (i.e., debt capacity, business purpose, and maximum interest rate) and a description of “low-function” and “low-risk” services for purposes of the arm’s length principle and calculating an arm’s length remuneration.