Skip to content

You are here:

Stricter rules for the cross-border transfer of functions as of 2022

If business functions are relocated from Germany to affiliated foreign companies or permanent establishments then the German fiscal authorities will tax not only the hidden reserves that exist in the individual transferred assets, but generally also the potential overall gain associated with the transferred function. Following the reform of the transfer of functions rules in the Foreign Transactions Tax Act (Außensteuergesetz, AStG) – which took effect from the 2022 calendar year and, in some cases, involved significant tightening – now, the ordinance on the transfer of functions (Funktionsverlagerungsverordnung, FVerlV) has also been updated. The amended version of the FVerlV was published in the German Federal Law Gazette on 25.10.2022 and has, thus, likewise come into effect for 2022.

Criteria for a transfer of a function

According to the previous version of the ordinance, a transfer of a function occurred when “a company (the transferring company) transferred, or made available for use, assets [..] [or] other benefits as well as the associated opportunities and risks to another affiliated company (acquiring company) so that the acquiring company was able to perform a function that was previously performed by the transferring company and, as a result, there was a restriction at the transferring company in the performance of the relevant function” (Section 1(2) FVerlV, old version). 

The new FVerlV has modified the old version in a more stringent way for the taxpayer.

  • So, a partial transfer would already be sufficient for a transfer of a function.
  • In addition, for a transfer of a function it is no longer necessary for assets or other benefits to be transferred or made available for use. The simple relocation of a function would likewise suffice. This would be understood to be a business activity that consists of similar operational tasks that are carried out by specific divisions/departments in a company.
  • Furthermore, a transfer of a function would also occur if the acquiring company does not perform the relocated function but, instead, is able to expand an existing function. 
  • Ultimately, the requirement for a restriction of function at the transferring company was removed from the definition. This is however unlikely to have many practical implications since a transfer of a function will not occur at another point (as would have been the case under the old version of the FVerlV) if no restriction of the function has occurred at the transferring company within five years after the transfer (i.e. there is a so-called duplication of functions), or if it can be credibly demonstrated that the restriction of the function is not directly attributable to the transfer.
  • Under the old version of the FVerlV, there were specific exceptional cases where no transfer of functions would have occurred (Section 1(7) FVerlV old version; in particular, in the case of mere services). These exceptions are no longer included in the new version.

Legal consequences of a transfer of functions

The legal consequences of a transfer of functions can be inferred from figure 1.

Please note: In the section below we have not discussed the use of appropriate comparative data in detail since this only occurs in exceptional cases.

The Norm – Transfer package valuation 

In the course of the transfer of a function it is necessary to value the relocated function, the associated opportunities, risks, assets and benefits that are transferred/made available for use as well as the services provided in this regard as a whole (taken together: the transfer package). Here, recognised economic valuation techniques will be applied – in order to determine the marginal prices of the transferring company (lower price limit) and the acquiring company (upper price limit) – that usually require investment calculations. If the taxpayer does not credibly demonstrate a different price within the area of agreement then the average value will be used to calculate the tax charge. Therefore, according to this presumption rule, all kinds of locational advantages including also, for example, those of a purely fiscal nature, that can be achieved solely by the acquiring company will result in an increase in the value to be assigned to the transfer package.

In this connection, the new version of the FVerlV provides for the following adjustments to the current situation.

  • Under the old version of the FVerlV, if there were any doubts as to whether it could be presumed that the transfer package or individual parts thereof had been transferred or made available for use then, at the request of the taxpayer, the provision of usage rights was assumed. This simplification provision is no longer to be found in the new version of the FVerlV, although it remains to be seen whether or not this actually constitutes a relevant change.
  • Under the old version of the FVerlV, when capitalising future earnings it was possible to use a forecast period shorter than infinity if the relevance of the shorter period was plausibly demonstrated. By contrast, in the new version of the FVerlV, there is a requirement for (full) evidence to be presented.
  • The old version of the FVerlV stipulated that the discount rate had to be determined on the basis of the after-tax interest rate for a risk-free investment to which a premium was added that adequately reflected the function and the risk. Here, standard business risk assessments had to be used from the perspective of the transferring company and the acquiring company respectively; in practice, simplifying approaches were also applied here. However, the new version of the FVerlV explicitly prescribes the derivation of a capital market premium so that it can be expected that there will, potentially, be a greater effort involved in determining the discount rate.

Under certain circumstances, it will still be possible to make retroactive adjustments to the transfer package valuation that could be disadvantageous to German taxpayers (statutory price adjustment rule) if (cumulatively) 

  • material intangible assets or benefits are the object of the business relationship, 
  • the transfer prices that would have been agreed had the actual profit development become known in the first seven years following the conclusion of the transaction deviate by more than 20% from the agreed transfer prices,
  • there is no appropriate price adjustment rule and 
  • the taxpayer does not refute that, at the time when the transaction was concluded, there were uncertainties as regards the determination of transfer pricing and that independent third parties would have agreed an appropriate price adjustment rule. 

Please note: In such a case, normally, it has to be assumed that in the eighth year following the conclusion of the transaction an appropriate adjustment amount would have been added to the transfer price used as a basis to calculate the tax charge.

The exception – Valuation based on individual prices 

If all the conditions that are mentioned in Figure 1 have been met then the taxpayer may use the individual transfer prices instead of the overall transfer package valuation as a basis. In this case, the individual transferred assets would be recorded at their assessed market values. How these values have to be calculated can only be determined in specific individual cases. An individual value assessment is normally easier and involves less work than the definition and overall valuation of a transfer package, as described above.   

The conditions for such a simplification of the process have been developed so that they apply primarily to the transfer of routine functions. Examples here could be, besides the establishment of a contract manufacturer, the transfer of the sales function to a low-risk distributor that is remunerated

  • on the basis of a cost-based form of the transactional net margin method (TNMM), or
  • one that includes commission that reflects the low risk.

Please note: You can find the (German) version of the FVerlV that was passed by the Bundesrat [upper house of the German parliament] online at as BR-Drucks. 423/22. This version corresponds almost entirely to the preceding draft law and it is also available online (in German) on the website of the Federal Ministry of Finance ( along with the comments that were submitted by various trade associations.

Back to top of page