Tightened Transfer Pricing Documentation Requirements from 2025 onwards
German companies that maintain foreign business relationships have extended obligations to cooperate with the German tax authorities. This applies, for example, to the submission of the transfer pricing documentation on transactions with foreign related parties. The regulations on the submission of the transfer pricing documentation for the purposes of a tax audit will now be significantly tightened as of 01.01.2025.
The transfer pricing documentation generally consists of the following two components:
1. Master File: The Master File contains information on the global business activities and transfer pricing policies of a multinational enterprise group. It provides an overview of the group's business activities, value creation, organizational structure, financial and economic situation as well as the basic transfer pricing strategy with regard to intangible assets, financing and intra-group services, among other things. As a rule, a master file only has to be prepared by companies that are part of a multinational enterprise group and whose consolidated turnover exceeds EUR 100 million.
2. Local File (Country-specific, company-related documentation): The Local File relates to the specific foreign business transactions of a company with related parties. It contains detailed information on the type and scope of the transactions as well as the selection and appropriateness of the transfer pricing method used in each case. A local file must be created if the transfer prices with foreign related parties exceed certain thresholds. For supplies of goods, the threshold is EUR 6 million per year; for all other transactions, e.g. fees for services, for the transfer of capital or IP, an annual threshold of EUR 600,000 applies.
Multinational enterprise groups whose consolidated turnover exceeds EUR 750 million must also submit a country-by-country reporting as a third component.
Obligations to Submit the Transfer Pricing Documentation from 2025 onwards
Until now, the transfer pricing documentation only had to be submitted upon a separate request, which was usually issued as part of a tax audit, and then within 60 days. From 01.01.2025, this submission obligation will now become significantly stricter.
If a tax audit order is issued from 01.01.2025 onwards, obliged companies must submit part of their transfer pricing documentation without further request within 30 days of notification of the tax audit order. The stricter requirements already adopted in 2022 originally stipulated that all documentation had to be submitted within this timeframe. The Fourth Bureaucracy Relief Act, which was passed in October 2024, eased the regulation somewhat before it came into force: however, the Master File - if the corresponding size thresholds are exceeded - , the documentation of extraordinary business transactions (e.g. asset transfers as part of a restructuring, a change to particularly significant intra-group contracts or the conclusion of allocation agreements within the group) and a transaction matrix must still be submitted without further request and within 30 days.
The transaction matrix should contain information on the type, scope and transfer pricing method applied of the various foreign business transactions. This should provide the tax auditor with an overview of the foreign business transactions and, ideally, only require specific additional information on the transactions. Notwithstanding this, the tax authorities can also request the entire Local File, which must then be submitted within 30 days.
Consequences of Non-Fulfillment
If the submission obligations are not fulfilled or not fulfilled on time, this can have considerable consequences: In the event of non-submission, there is initially a (rebuttable) presumption that the actual taxable income from intra-group transactions is too low. The estimation framework that the tax authorities apply to the transactions may then be exhausted to the detriment of the taxpayer. In addition, a penalty surcharge of 5 to 10 %, but at least EUR 5,000, is levied on this increased tax amount for each transaction. A penalty of up to EUR 1,000,000, but at least EUR 100 per day that the deadline is not met, will be imposed for late submission.
The amounts stated relate to each individual business transaction and each individual audit year, which means that considerable amounts can quickly add up. No assessment is made if there is only minor culpability or the failure to fulfill the obligations appears excusable.
In order to comply with the regulations applicable from 01.01.2025 regarding the submission of transfer pricing documentation during tax audits and to avoid sanctions, companies that are part of a multinational enterprise group of companies should seek early consultation with their tax advisor. In this consultation, it should be discussed whether there is an obligation to prepare transfer pricing documentation for the next tax audit period. Based on this classification and the scope of your relevant business transactions, the next step is to agree whether and which documentation should be prepared prior to the tax audit.