Transfer pricing is the number-one focus area in group tax audits. If you cannot produce audit-proof documentation, you risk an estimated assessment — and it will rarely be in your favour. Here is when documentation is mandatory and what it must contain.
What transfer prices are
Transfer prices are the prices at which affiliated companies provide services or supply goods to one another. Classic examples:
- A holding GmbH advises its operating subsidiary GmbH for a fee
- A German parent supplies components to a foreign subsidiary
- Sister companies share IT infrastructure and allocate the costs
- An intra-group loan bearing interest
- Licence fees for group-owned IP
These prices must comply with the arm's-length principle : they must be set at the level independent third parties would have agreed. Price too high or too low and you shift profits — and that is precisely what the tax office scrutinises.
When documentation is mandatory
Mandatory under § 90 (3) AO (German Fiscal Code) in conjunction with the GAufzV
Documentation is mandatory where:
- Cross-border business relationships with related parties exist
- Total transactions exceed €6 million (goods) or €600,000 (other services) per year
Master File & Local File (CbCR)
For larger groups (consolidated revenue above €750 million), the following also apply:
- Master File: overview of the global group structure, value chain and transfer pricing policy
- Local File: detailed documentation of material transactions per country
- Country-by-Country Reporting: annual reporting of key group figures per country
What the documentation must contain
Statement of facts
- Group organisational chart and shareholding structure
- Description of each entity and its functions
- Each entity's contribution to value creation
- Material intangible assets (brands, patents, know-how)
- List of cross-border business relationships
Arm's-length analysis
- Functional and risk analysis per transaction
- Transfer pricing method (comparable uncontrolled price, resale price, cost plus, profit split, residual profit method)
- Rationale for the choice of method
- Benchmark study with comparable data
- Result and conclusion
In a tax audit, transfer pricing documentation must be produced within 30 days . Miss that deadline and you are deemed in default. For extraordinary transactions (restructurings, IP transfers), the deadline is even shorter — 30 days after the transaction takes place.
Penalties for non-compliance
- Estimated assessment against the taxpayer: where documentation is missing or deficient, the tax office may estimate. Estimates typically run 20–50% above the self-declared figures.
- Surcharge: for late submission, 5–10% of the adjustment amount, with a minimum of €5,000.
- Fine: for incomplete documentation, up to €10,000 per violation.
What we do at TABAK
For every client with cross-border related-party arrangements, we prepare transfer pricing documentation that is audit-proof and up to date. We coordinate with foreign partner firms, run benchmark studies using databases such as TP-Catalyst and RoyaltyStat, and deliver the Master File / Local File structure in the format recommended by the OECD.
More than 20 years advising entrepreneurs, investors and family businesses. Reserved tax services are provided by our partner tax firm, TABAK Steuerberatung.
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