Transfer Pricing: Rules and Practice in Selected Countries (E-G) (Portfolio 6950)

Tax Management Portfolio, Transfer Pricing: Rules and Practice in Selected Countries (E–G), No. 6950, presents the rules and practice related to transfer pricing in France and Germany.

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Chapter 50, “Transfer Pricing Rules and Practice in France,” examines the primary legal basis for French transfer pricing adjustments, Section 57 of the General Tax Code, as well as the alternative legal bases (the act of mismanagement concept, the abuse of law theory, excessive payments to tax havens, and recapture of profits shifted to tax havens). The chapter describes the approach of the French revenue authorities in determining transfer prices, the practical considerations in transfer pricing investigations, and the role of double taxation agreements in the transfer pricing context.

Chapter 55, “Transfer Pricing Rules and Practice in Germany,” begins with a discussion of the relevance of transfer pricing in Germany and the role of transfer pricing in the German tax system. The chapter then analyzes the German transfer pricing rules and describes the application of those rules to specific types of transactions, including transfers of tangible and intangible property, interest and similar remuneration, services, and cost sharing arrangements. The chapter also discusses the consequences of a transfer pricing adjustment, compliance and litigation, administrative rules, and the coordination of transfer prices with German customs and value added tax declarations.

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The Transfer Pricing: Rules and Practice in Selected Countries (E–G) Portfolio is authored by the following experts.
Bruno Gouthière graduated from the Ecole Nationale d'Administration, the University of Paris, Master in Law and BS in Economics, and the Institut d'Etudes Politiques of Paris. He has been a partner with CMS Bureau Francis Lefebvre, international tax department, since 1989; previously, he was Chief of Staff, International Tax Relations, Tax Policy Department, Ministry of Finance. He is the author of reference books in international tax law, such as “Les Impôts dans les affaires internationales”, “Les Holdings”, “The International Guide to Holding Companies” (IBFD, co-editor), co-author of various books on “Wealth” (Memento du Patrimoine), “Civil Companies” (Memento Sociétés Civiles), Groups of Companies (Memento Groupes), etc., and of numerous articles in French and foreign legal, tax, and financial reviews. He is notably a member of the Transfer Pricing Advisory Board of the Tax Management International Journaland a member of various associations of tax practitioners such as the International Fiscal Association (“IFA”) and the Fiscal Committee of the European Fiscal Confederation (“CFE”). 

Klaus Sieker is a tax partner at Flick Gocke Schaumburg. He heads the Frankfurt office. His practice focuses on international transactions, re-organizations, joint ventures, transfer pricing and the taxation of trusts. In 1984, he graduated from Hamburg University, where he also obtained his Doctor's degree in economics in 1989. After qualifying as tax advisor, he joined Coopers & Lybrand in Hamburg in 1989, later taking an assignment to Coopers & Lybrand, New York in 1994. In 1995, he joined Flick Gocke Schaumburg, a multidiciplinary partnership of lawyers and accountants.


Portfolio 6950-1st: Transfer Pricing: Rules and Practice in Selected Countries (E-G)

Portfolio Description


Technical Advisors


Significant Developments

Significant Developments



Pending Legislation

France Releases Draft 2014 Finance Bill

French Parliament Proposes Changes to Transfer Pricing Documentation Rules


Administrative Developments

Inspectorate General for Finance Releases Proposals To Improve Transfer Pricing Regime


Decision on Tax Authority Use of Secret Comparables in Cash Pooling Case

Court Decision on Documents Obtained by French Taxing Authority via Foreign-Based Server

Ruling on Cross-Border Transfer of Cash Pooling Function

Court Decision on Allocation of Profits to a Permanent Establishment

Administrative Ruling on Related-Party Internet Domain Name Transfer


Enacted Legislation

Germany Implements OECD Approach to PE Profit Attribution into Law, Issues Draft Regulations


Federal Tax Court Decision on Compatibility of Transfer Pricing Documentation Rules with EU Law

Federal Tax Court Decision on Article 6(1) of Germany-Netherlands Treaty

Detailed Analysis

CHAPTER 50: TRANSFER PRICING RULES AND PRACTICE IN FRANCE by Bruno Gouthière, Partner CMS Bureau Françis Lefebvre France

50:I. Introduction

A. Overview of the French Attitude Vis-à-Vis Transfer Pricing

B. Transfer Pricing Within the Context of the French Taxation Principles Governing Companies or Enterprises

1. Overview of the French Territoriality Principle and Its Consequences in the Field of Transfer Pricing

2. The General Principle of Nonrecognition of Groups for Tax Purposes

a. Consolidated Reporting Permitted by Ruling

b. Ability to Take into Account Foreign Losses Under Case Law

50:II. The Predominant Legal Basis for Transfer Pricing Adjustments: Section 57 of the French General Tax Code

A. Overview

B. Conditions for the Application of Section 57

1. Scope of the Provision

a. Broad Interpretation by Regulations and Courts

b. Coordination with Treaty Provisions

2. The Dependence Test: Applicability to Related Companies

a. Legal Dependence

(1) Under Regulations

(2) Under the Case Law

b. De Facto Dependence

(1) Under Regulations

(2) Under the Case Law

c. The Particular Situation of Tax Havens

3. The Transfer of Profits Test: Definition of Transactions Subject to Transfer Pricing Investigation, in General

C. Procedural Matters

1. Overview of the Audit Process

a. Background

b. Discussion with the Taxpayer § The Role of the “Commission Départementale des Impôts”

c. Statute of Limitations

2. Burden of Proof Under Section 57

a. Burden on the Revenue Authorities

b. Burden on the Taxpayer

3. Overview of the Litigation Process

D. Consequences of a Transfer Pricing Adjustment Under Section 57

1. Corporation Tax Consequences

a. The Predominant Method: Direct Evaluation

b. The Secondary and Rarely Used Alternative Method: Comparison of Profits

2. Distributed Income and Withholding Tax Problems

a. Determination of the Applicable Rate

b. Solutions Under Double Taxation Agreements

(1) Treaties Which Follow the Traditional OECD Treaty Wording

(2) Treaties Which Expansively Define Dividends

(3) Treaties Which Refer to Income from Corporate Rights and Assimilated Income

c. Practical Solution to Avoid Withholding Tax

3. Penalties

a. Good Faith (“Absence of Willful Breach”)

b. Bad Faith (“Willful Breach”)

c. Tax Evasion

d. Avoidance of Penalties

e. Transfer Pricing Documentation Penalty

50:III. Alternative Legal Basis for Transfer Pricing Adjustments

Introductory Material

A. The Act of Mismanagement Concept

1. In General

2. Application to Transfer Pricing Issues

3. Consequences of a Transfer Pricing Adjustment Based on the Act of Mismanagement Concept

B. The Abuse of Law Theory

1. In General

2. Application of the Abuse of Law Theory in an International Context and in Transfer Pricing Issues

3. Consequences of an Adjustment Under the Abuse of Law Theory

C. Section 238 A: Excessive Payments to “Tax Havens”

1. Conditions Under Which Section 238 A May Be Applicable

2. Consequences of the Application of Section 238 A

3. Ways of Avoiding Section 238 A

D. Section 209 B: Recapture by France of Profits Shifted to “Tax Havens”

1. Situations Under Which Section 209 B Is Applicable

2. Exceptions to the Application of Section 209 B

3. Consequences of the Application of Section 209 B

4. An Illustration of the Application of Section 209 B to Transfer Pricing Issues

5. Ways of Avoiding Section 209 B

50:IV. Tentative Approach of the French Method for Determining Transfer Pricing

Introductory Material

A. In General

1. The OECD Commentaries as the French Basic Reference

2. French Perspectives on U.S. Transfer Pricing Policy

a. Increased Risk of Double Taxation: The Commensurate with Income Principle and the Comparable Profits Method

b. Difficulties Concerning Discrimination Problems and Reporting Requirements

B. Transfer Pricing Issues in the Case of Tangible Goods

1. Methods

2. Practical Examples

C. Transfer Pricing Issues in the Case of Intangibles

1. In General

2. Particular Considerations with Respect to Valuation of Patents in France

3. Practical Examples

D. Transfer Pricing Issues in the Case of Services

1. Administrative Services in General

2. Particular Considerations in the Case of Research and Development Costs

a. Possible Existence of a Partnership Agreement

b. Existence of Services Rendered

c. Amount of Compensation

d. Withholding Tax Issues

3. Practical Examples

E. Loans and Financial Services in General

1. The Level of Interest

a. In General

b. Practical Examples

2. Thin Capitalization Problems

3. Forgiveness of Debt Claims and General Issue of Subsidies Between Related Companies

a. Subsidies of a Commercial Nature

b. Financial Subsidies

c. Illustration of the Above Principles in Case of Guarantee Fees

F. Start-Up and Market Penetration Expenses

G. The Particular Issue of Transfer Pricing in the Presence of a Permanent Establishment

1. Permanent Establishments in General

a. Proportional Allocation

b. Comparative Method

2. Allocation of Profits

3. Allocation of Expenses

50:V. Further Practical Considerations in Transfer Pricing Investigations

Introductory Material

A. How Can the DGI Establish a Transfer of Profits?

1. The Right of Communication: Compulsory Disclosure and Visitorial Power

2. Exchange of Information with Treaty Partners

B. How Can the Taxpayer Prepare to Resist Transfer Pricing Adjustments?

1. In General

2. Overview of the APA Process

3. Discussion of the Regulations

a. Background

b. Administrative Process

c. Agreement Between the Taxpayer and the Administration

d. Legal Guarantee Given to the Taxpayer

e. Further Obligations of the Taxpayer

f. Administrative Office in Charge

4. The Possibility of Getting a Unilateral APA

5. The Specific Case of a Unilateral APA in the Area of Research and Development

50:VI. Elimination of Double Taxation Resulting from Transfer Pricing Adjustments

Introductory Material

A. In General

1. Determination of the Taxpayer Concerned

2. Procedural Aspects

3. General Remarks on the Outcome of the Procedure

B. The Issue of Corresponding Adjustments

1. Corresponding Adjustments in the Absence of a Distribution of Income

2. Corresponding Adjustments Where There Has Been a Distribution of Income

CHAPTER 55: TRANSFER PRICING RULES AND PRACTICE IN GERMANY by Dr. Klaus Sieker, Partner Flick Gocke Schaumburg Frankfurt, Germany

55:I. Introduction

A. Relevance of Transfer Pricing in Germany

1. Corporate Law

2. Customs Law

3. Evaluation of Management Performance

4. Income Taxes

B. Relationship Between the German Tax System and Transfer Pricing

1. Overview of the Income Taxation of German Companies

a. Federal and Municipal Tax Rates

b. The Semi-Income System

c. Computation of Taxable Income

d. Consolidation

e. Contributions to Capital

f. Distributions

g. Losses

h. Income from Cross-Border Transactions

i. Current Inclusion of Low-Taxed Passive Income of Controlled Foreign Corporations

j. Rules Against Tax Avoidance

2. Taxation of Foreign Multinationals with German Operations

a. Export of Goods and Services

b. Permanent Establishment

c. Partnerships

d. Subsidiaries

3. Tax Planning and Transfer Pricing

4. Assessment of Income Taxes

5. Audit Procedures

6. Administrative and Judicial Appeals

55:II. Basic German Transfer Pricing Rules

A. Transactions Between Related Parties Subject to German Transfer Pricing Rules

B. Parties Subject to Transfer Pricing Reallocation Rules

C. Transfer Pricing Standards

1. Statutes, Treaties, and Decrees

a. Article 9 (1) OECD Model Income Tax Treaty/ U.S.-Germany Income Tax Treaty

b. Section 8(3) of the Corporation Income Tax Act § Hidden Profit Distribution

c. Section 8(3) of the Corporation Income Tax § Hidden Capital Contribution

d. Section 1(1) of the Foreign Tax Act

e. Section 1(3) of the Foreign Tax Act

f. Decree with Respect to the Application of the Arm's-Length Principle Pursuant to Section 1(1) of the Foreign Tax Act in Cases of Cross-Border Transfers of Functions (Decree on the Transfer of Functions)

g. Section 1(4) of the Foreign Tax Act

h. EU Arbitration Convention

i. Burden of Proof

2. Administrative Interpretations

a. Administrative Guidelines

b. OECD Commentary to Art. 9 and the OECD Transfer Pricing Guidelines

3. Rules for Applying the Arm's-Length Principle

4. Available Transfer Pricing Methods

a. Traditional Transactional Methods

b. Profit Methods

c. Other Methods

d. Use of Transfer Pricing Methods

5. German Transfer Pricing Rules Compared with the U.S. and OECD Rules

a. Comparison with the U.S. Rules

b. Comparison with the OECD Rules

55:III. Specific Transfer Pricing Rules for Certain Transactions

A. Arm's-Length Transfer Price for Tangible Property

1. Methods

2. Transfer of Tangible Property in Connection with Other Intercompany Transactions

3. Contract Manufacturing

4. Market Penetration and Market Maintenance Costs

5. Marketing Expenses

6. Continuing Losses

7. Acceptance of Below-Cost Prices

8. Currency Exchange Rate Fluctuations

B. Arm's-Length Transfer Price for Intangible Property

1. Methods

2. Database on Royalty Rates

3. Adjustments over Time

4. Coordination with Tangible Property Rules

5. Marketing Intangibles

6. Blocked Payments

C. Interest and Similar Remunerations

1. Compensation for Borrowed Funds Treated as Hidden Profit Distribution

2. Appropriate Compensation Level

3. Effect of Foreign Legal Restrictions Against Equity Financing

4. Adjustment of Interest Rates over Time

5. Guarantees and Similar Arrangements

6. Interest-Free Loans

D. Services

1. Methods

2. Services Connected with Other Transactions

3. Marketing Services

4. Financial Services

5. Administrative Services

6. Contract Research

E. Transfer of Functions

1. In General

2. Methods

3. Definitions

4. Valuation of a Transfer Package

5. Types of Transfers

F. Employee Secondments

G. Cost Sharing Arrangements

1. In General

2. Scope

3. Eligible Participants

4. Allocable Costs

5. Determination of the Cost Share

6. Buy-In/Buy-Out Payments

7. Documentation

8. Consequences of Deficient Cost Sharing Arrangements

9. Miscellaneous

H. Set-Offs

55:IV. Consequences of a Transfer Pricing Adjustment

A. Primary Adjustments Relating to Transactions Between a Parent and Subsidiary

1. Upward Adjustment § Hidden Profit Distribution

2. Upward Adjustment § Hidden Capital Contribution

3. Upward Adjustment § Section 1 of the Foreign Tax Act

4. Downward Adjustment § Hidden Profit Distribution

5. Downward Adjustment § Hidden Capital Contribution

B. Primary Adjustments Relating to Transactions Between Sister Companies

C. Corresponding Adjustments

D. Correlative Adjustments

E. Compensating Adjustments

F. Secondary Adjustments

G. Conforming Adjustments

H. Rescission of Hidden Profit Distributions

I. Interest on Deficiencies and Overpayments

J. Penalties

1. In General

2. Transfer Pricing Penalties

55:V. Compliance and Litigation

A. Information Reporting and Record Keeping

1. General Remarks

2. Scope

a. Reports on Foreign Investments

b. Tax Returns and Financial Statements

c. Transfer Pricing Documentation

B. Transfer Pricing Audits

1. General Remarks

2. Audit Approach

3. Justification of Transfer Prices by a Taxpayer

4. Simultaneous Tax Examinations

5. Information Demands of the Tax Authorities

6. Information Sources of the Tax Authorities

C. Administrative Appeals

D. Judicial Appeals

55:VI. Competent Authority Proceedings, Advance Rulings, and Arbitration

A. Competent Authority Proceedings

1. General Remarks

2. Application for German Competent Authority Assistance

3. Carrying Out a Mutual Agreement Procedure

4. Involvement of Taxpayer

5. Implementing the Mutual Agreement

6. Practical Experience

B. Advance Rulings

1. General Remarks

2. Rulings Requested Subsequent to a Tax Examination

3. Rulings Requested Pursuant to Section 89(2) of the General Tax Code

4. Unilateral Transfer Pricing Rulings

5. Advance Pricing Agreements

C. Arbitration

1. EU Arbitration Convention

2. U.S.-Germany Arbitration Proceedings

3. Arbitration Under Other German Tax Treaties

55:VII. Coordination of Transfer Prices with German Customs and Value Added Tax Declarations


Working Papers

Table of Worksheets

Worksheet 1 Code Général des Impôts § Provisions Relating to Transfer Pricing

Worksheet 2 Livre des Procédures Fiscales § Provisions Relating to Transfer Pricing

Worksheet 3 Ministry of Finance Guidelines on APAs, Administrative Regulation 4 A-8-99 n°  17

Worksheet 4 French Ministry of Finance's Unilateral APA Guidelines [Issued 6/24/2005; translated by Landwell &  Associés, Neuilly sur Seine]

Worksheet 5 Documentation Provisions of French Tax Procedure Code

Worksheet 6 Official Commentary on Documentation Rules, Instruction 4 A-10-10 [Issued 1/4/11; Unofficial Translation by Fidal Direction Internationale]

Worksheet 11 Article 9 of the U.S.–Germany Tax Treaty of August 29, 1989 (Ratified August 21, 1991)

Worksheet 12 Provision 7 of the Protocol to the U.S.–Germany Tax Treaty of August 29, 1989

Worksheet 13 Sections 8 and 8a of the German Corporation Tax Act

Worksheet 14 Section 1 of the German Foreign Tax Act (Unofficial translation)

Worksheet 15 German Federal Tax Office's Model Questionnaire for Use in Transfer Pricing Audits.