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MOF issues updated guidance on relocation of functions

Tax authorities have amended controversial guidance regarding relocation of functions 

The German Ministry of Finance (MOF) published an updated decree providing “Administrative Principles regarding Transfer Pricing” on 6 June 2023 (“TP principles”). The updated decree replaces not only two-year-old general transfer pricing guidance that was published in a decree dated 14 July 2021 (see GTLN dated 29 July 2021), but also guidance on the transfer or relocation of functions. This guidance was outdated in light of a new law that went into effect on 1 January 2022.

The TP principles introduced a few new concepts that may be relevant to a taxpayer planning a transfer of function or having completed one after 31 December 2021, as further discussed below:

Outsourcing: When outsourcing a routine function for a cost-plus remuneration, no transfer package (including the size and content of the function) was subject to a transfer valuation until 31 December 2021 because it was deemed that no significant intangible assets were part of the transfer. However, as from 1 January 2022, the tax authorities request to see a calculation demonstrating that the transferred function does not include intangible assets that constitute greater than 25% of all assets transferred. In addition, while in the past transferred advantages were to be included in the calculation of the 25% materiality threshold, they now have to be examined separately. If the transfer includes any advantage, then the whole transfer becomes taxable based on the transfer package valuation.

Substitution: The exchange of one function for another is deemed to be a transfer of a function as well. The TP principles provide several examples, including the following:

  • Company A manufactures product A. Product A is not as profitable as another product, B, which relies on different intellectual property (IP), so company A transfers the product A manufacturing to a foreign entity and focuses on the manufacturing of product B instead. This triggers a transfer of function based on a transfer package valuation because the function (production of product A) was transferred.
  • In a slightly different example, product A is exchanged for its successor product, A.1, which again has greater profitability potential. Here, the tax authorities are of the opinion that, when product A’s IP is transferred for an arm’s length license payment and product A.1 supersedes product A in its principal markets, the minimum price of the transfer package can be set at zero.

Loss situation: The TP principles also provide guidance regarding loss-making functions. When transferring such functions, the tax authorities distinguish between four basic cases:

  • If the expected net present value (NPV) of future losses is lower than the transaction’s closing costs, the difference is the minimum price of the transfer package.
  • If the closing costs are lower than the NPV of expected losses, the minimum price is zero.
  • Alternatively, if the taxpayer has the option to close the transaction with or without the transfer of the function and the closing costs without the transfer are higher than the costs with the transfer, the cost difference is the minimum price of the transfer package.
  • Finally, if the NPV of expected future losses is lower than the closing costs without the transfer but higher that the closing costs with the transfer, it is assumed that the minimum price of the transfer package is the difference between the NPV of expected future losses and the lower closing costs.

Single intangible asset transfer: The single transfer of an intangible asset now must always be analyzed together with the shift of “control over risk” with respect to the associated DEMPE (development, enhancement, maintenance, protection, and exploitation) functions. Whenever a DEMPE function is active and controlled by the transferor and becomes part of the transfer of the IP, a transfer of a function together with a transfer package valuation has to be considered.

Stripping of function to routine: When stripping a full-fledged function to the routine level, if an arm’s length termination clause has been agreed, the valuation of the routine function must be based on an analysis of expected values that take into account both the financial surpluses in the event of the continuation of the function and the financial surpluses in the event of the termination of the routine contract (e.g., closing costs or compensation payments) in proportion to their respective probability of occurrence.


The updated TP principles are more restrictive than they were previously. The examples provided are welcome as they make the intent of the tax authorities easier to understand, although they are not completely aligned with German fiscal jurisprudence and fail to define what would constitute a partial transfer of a function. Diese Mandanteninformation enthält ausschließlich allgemeine Informationen, die nicht geeignet sind, den besonderen Umständen eines Einzelfalles gerecht zu werden. Sie hat nicht den Sinn, Grundlage für wirtschaftliche oder sonstige Entscheidungen jedweder Art zu sein. Sie stellt keine Beratung, Auskunft oder ein rechtsverbindliches Angebot dar und ist auch nicht geeignet, eine persönliche Beratung zu ersetzen. Sollte jemand Entscheidungen jedweder Art auf Inhalte dieser Mandanteninformation oder Teile davon stützen, handelt dieser ausschließlich auf eigenes Risiko. Deloitte GmbH übernimmt keinerlei Garantie oder Gewährleistung noch haftet sie in irgendeiner anderen Weise für den Inhalt dieser Mandanteninformation. Aus diesem Grunde empfehlen wir stets, eine persönliche Beratung einzuholen.

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