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Transfer pricing rules for financing transactions

Through the Growth Opportunities Act (cf. the following article) the German tax legislator introduced two specific transfer pricing rules on the treatment of financing transactions (Section 1(3d) and (3e) of the Foreign Transactions Tax Act [Außensteuergesetz, AStG]), which came into effect in 2024 for the first time. 

Inbound financing relationships

New legislation on the deduction of expenses 

Under the new legislation, it would not be consistent with the arm’s length principle if an expense arising from an intragroup cross-border financing relationship had reduced the taxpayer’s (German) income and, in addition:

(1)  the taxpayer could not credibly demonstrate that they (a) would have been able to service the debt over the entire term of the financing relationship from the outset (debt capacity) and that they (b) need the financing and used it for the corporate purpose (need for the financing); or

(2) the extent to which the interest rate payable exceeds the interest rate at which the company could obtain financing on the basis of the corporate group rating (here this should be understood to mean the rating of the head of the group). If proof is provided that an individual rating derived from the corporate group rating complies with the arm’s length principle then this individual rating would be decisive.

From 2024, fully claiming expenses for inbound financing relationships will be restricted even for already pre-existing financing relationships. 

Please note: If debt capacity cannot be credibly demonstrated then, according to the wording of the legislation, it is to be feared that the tax deduction of expenses will be denied outright. 

In the future, insofar as the aim will generally be to use the corporate group rating as a basis, then in a typical situation where the foreign head of the group enjoys better ratings than when making a sole comparison with the German subsidiary the following effect will ensue: the German lawmaker will ultimately assume that there is (full) implicit group support from the foreign head of the group for the German borrowing subsidiary so that the lawmaker will accept only interest rates that are lower than would be the case in a standalone situation for the German subsidiary; by contrast, if only limited support or even none at all could be expected from the head of the group in the event of the borrowing company entering into a crisis then the German subsidiary would have to provide proof of this and then derive its own applicable standalone rating from the corporate group rating. 

Please note: When compared with the previous legal situation, the burden of work and of proof has thus effectively been reversed because, in the opinion of the Federal Fiscal Court (ruling of 18.5.2021, case reference: I R 4/17), up to now, the borrower’s standalone rating frequently had to be primarily used.


For inbound financing relationships the following recommendations for action can be inferred:

  • from 2024, if transfer pricing related restrictions on the recognition of expenses for inbound financing relationships are to be avoided then the new legal provisions will also have to be complied with in the case of pre-existing intragroup financing relationships.
  • If a debt capacity forecast was not already prepared when the respective financing relationship commenced then such a forecast should be prepared, without further delay, on the basis of the circumstances and knowledge at that time (cut-off date principle).
  • It likewise has to be credibly demonstrated that the financing is needed and that it will be used in accordance with the corporate purpose. These requirements should be met not just at the start of a financing relationship; rather, evaluations also need to be made with respect to, for example, the extent to which excess liquidity generated during the term of the loan should be used for repayment purposes.
  • Ultimately, if a taxpayer in Germany wants to deviate from the corporate group rating then an increased workload will be imposed on them in two respects: firstly, they would have to determine the corporate group rating and, subsequently, from this derive the borrower’s individual rating. By contrast, according to the wording of the legislation, it would not be possible to ‘freely’/directly determine the individual rating. Furthermore, it would however be necessary to provide proof that in the actual individual case it is not the corporate group rating but rather the individual rating that complies with the arm’s length principle.

Referring or brokering of financial relationships, treasury and financing companies

New legislation on low-function and low-risk services

Under the legislation, if on the basis of a functional and risk analysis no evidence to the contrary is provided, then a low-function and low-risk service will normally be deemed to exist if

  • a financing relationship between one company and another group company is brokered or is referred, or
  • i f a company in the group of companies assumes the management of funds or acts as a financing company for one or more group companies.

Please note: This provision will thus affect, for example, cash pools, treasury and financing companies.

In the case of low-function and low-risk routine services the appropriate transfer prices are frequently determined on the basis of the cost-plus method. In such cases, it is likely that in the future there will be no more discussions with the fiscal administration about the correct transfer pricing method. 


The following action points should be taken into account:

  • From 2024, this rule likewise applies, without any transitional arrangements, to business relationships that had already been previously agreed.

There should therefore be a review of the extent to which any necessary redetermination of the reasonable charges is appropriate.

  • Insofar as the taxpayer does not manage the above-mentioned business relationships as routine services then, from 2024 at the very latest, great importance will be attributed to the detailed proof of the functions performed, the risks assumed and the assets employed. In such cases, it would therefore often be advisable to focus attention on a precise and full analysis of the facts and circumstances and their documentation.
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