In 2021, the AbzStEntModG revised the regulations on the arm's length principle and aligned them with the current OECD transfer pricing guidelines. As part of this, the rules in relation to relocations of functions were also revised and moved into the newly implemented section 1 (3b) of the German Foreign Tax Act (“AStG"). As a result, the provisions of the current Ordinance on the Relocation of Functions no longer refer to the current version of the law and have become partially obsolete due to their incorporation directly into the law.
The new provisions relate to the cross-border relocation of functions between affiliated companies, as well as between permanent establishments or between a permanent establishment and its headquarters. The provisions should be applied to relocations of functions in assessment periods beginning after December 31, 2021. As the amended provisions are expected to apply from beginning of the assessment period, the new version is also relevant for restructurings already carried out prior to the adoption of the new Ordinance, meaning that it would de facto have retroactive effect.
According to the explanations in the draft bill, it is essentially aimed at closing the gaps that arose from the reorganization of section 1 of the German Foreign Tax Act and it is therefore heavily based on the current version of the Ordinance. To the extent that provisions of the original Ordinance have been incorporated into section 1 of the German Foreign Tax Act by the AbzStEntModG, they are no longer included in the new version of the Ordinance. However, the draft clearly goes beyond purely editorial amendments, making it worthwhile to take a closer look at the main changes. We anticipate that an updated BMF letter on the relocation of functions will be published shortly after the new Ordinance comes into effect, in which the position of the tax authorities will be further specified.
As explained above, the new Ordinance is based on the previous version published on August 12, 2008 and aims to close gaps arising from the reorganization of section 1 of the German Foreign Tax Act. To the extent that provisions of the original Ordinance have been incorporated into section 1 of the German Foreign Tax Act by the AbzStEntModG, they are no longer included in the new version of the Ordinance, and the resulting blind references have been amended. In addition, editorial changes have been made and terminology has been adapted to more common formulations. For example, in the regulations on the value of the transfer package in the new section 2 of the Ordinance, instead of "profit potential", the term "financial surplus" is used, which is more common in the context of business valuations.
Nevertheless, the draft goes far beyond purely editorial adjustments. The following changes are particularly noteworthy:
Following the adoption of the AbzStEntModG, the ongoing tightening of the legal environment is now also reflected in the planned amendments to the Ordinance on the Relocation of Functions. The new version considerably restricts the legal options for German taxpayers to avoid the holistic transfer package valuation. Additionally, the tendency towards a considerable extension of the burden of proof is highly problematic. In the future, it is likely as a minimum to result in a significant additional effort for companies and tax consultants, provided that satisfying the burden is factually possible at all.
The effect of the draft regulation on the valuation, and thus also the tax amount, can be described very briefly as being to the benefit of the tax authorities for many cases. In this context, revised administrative principles on the relocation of functions are necessary in order to be able to act with legal certainty if the ambiguities rising from the current draft are not eliminated in the final version, or if the existing questions remain unanswered.
With its provisions on the legally certain and uniform application of the arm's length principle to relocations of functions under section 1 (3b) of the German Foreign Tax Act, the new Ordinance is intended to be authoritative and applicable for relocations of functions in assessment periods beginning after December 31, 2021. Therefore, the new version would also be retroactively relevant for restructurings that were already carried out after this date, but prior to its adoption.
With the publication of the draft, associations were given the opportunity to comment on it. After finalization by the BMF, the Bundesrat must still approve the Ordinance.
Federal Ministry of Finance, draft bill of 25 May 2022, published on 05 July 2022
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