EU-Germany: Draft EU Transfer Pricing Directive

Editorial Team 22 Sep 2023

An overview from Flick Gocke Schaumburg on the EU Commission's publication of the draft Transfer Pricing Directive on the uniform implementation and application of the arm’s length principle.

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Insight and commentary from our German firm, Flick Gocke Schaumburg


The EU Commission has published the draft EU Transfer Pricing Directive on the uniform implementation and application of the arm’s length principle.


Background and objectives

The draft directive is part of the “BEFIT” package (“Business in Europe: Framework for Income Taxation”), which also provides for the draft directive to determine a uniform EU-wide tax base for large MNE in the EU.

According to the EU Commission’s assessment, member states currently have a great deal of discretion in applying the OECD Transfer Pricing Guidelines 2022 (“OECD Guidelines”). On the one hand, this allows for transfer pricing arrangements. On the other hand, it leads to increased double taxation as well as increased compliance costs, which impairs the competitiveness of the domestic market. Against this background, the draft directive pursues the following goals:


  • implementation and uniform interpretation of the arm’s length principle,
  • clarification of the role of the OECD guidelines,
  • reduction of double (non)taxation and
  • mitigating compliance burdens.

To ensure a uniform interpretation of the arm’s length principle, the OECD guidelines are to be bindingly applied in the EU member states in the future. Provided the draft directive is adopted unanimously in the EU Council, its provisions will be applied and implemented domestically from 2026.


Arm’s length principle and related parties

According to the arm’s length principle, intra-group transactions between related parties should be priced in the same way as would be agreed by third parties in comparable situations. The concept of related parties is precisely defined with the threshold for the shareholding being at least 25%. Permanent establishments are to be treated as separate entities for the application of the arm’s length principle in accordance with the Authorised OECD Approach (“AOA”).


Application of the most appropriate transfer pricing method

According to the draft directive, transfer prices are to be determined on the basis of one of the five established methods according to the OECD guidelines, which most closely corresponds to the arm’s length principle for the respective business transaction. A different valuation method should only be applied if it can be demonstrated that (i) none of the permitted methods can be adequately applied and (ii) the different method leads to an appropriate result.


Arm’s length range

Often, it is not possible to determine the one “right” transfer price. Rather, the application of transfer pricing methods results in a range of values. The arm’s length range should be determined on the basis of an interquartile range (25%-75%). Member states should not make any income adjustments if a transfer pricing result lies within this range. If a transfer pricing result is outside the interquartile range, a correction to the median should in principle be made.


Compensating adjustment

Compensating adjustments in the form of year-end adjustments initiated by the taxpayer shall be recognised in the other member state, especially if the taxpayer has already made an effort to achieve an arm’s length result on the basis of the transfer prices settled during the year and a deviation can be justified. Furthermore, the year-end adjustments must be indicated before the tax returns of the companies concerned are submitted.


TP documentation

The draft directive requires taxpayers to provide sufficient transfer pricing documentation. The exact content of this TP documentation will be determined by the EU Commission at a later date. It can be assumed that the OECD guidelines on the three-tier transfer pricing documentation approach (consisting of local file and master file as well as CbCR) will be used as a basis.


Corresponding adjustments within a “fast-track procedure”

The draft of the EU Transfer Pricing Directive provides for a mechanism whereby member states shall make a corresponding adjustment at the request of the taxpayer if the tax administration of another member state makes a transfer pricing-related income adjustment. The essential prerequisites for this are that the income adjustment is in line with the arm’s length principle and that it leads to double taxation. The corresponding adjustment should not only be made possible through a mutual agreement procedure, but also within the framework of an accelerated procedure (“fast-track procedure”). Such a fast-track procedure shall be completed within 180 days.


Mandate of the EU Commission

The EU Commission is seeking greater influence on future transfer pricing regulations. This is because the draft directive empowers the EU Council to issue further regulations for intra-group transactions on the basis of a proposal by the EU Commission. Apparently, unanimity will not be required for these further regulations of the EU Council, but rather an approval of 55% would already suffice. It remains to be seen whether the member states will agree to such a significant extension of EU competence.


Cornelia Andree

Christian Heider

Flick Gocke Schaumburg, Germany

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Article tags

EU | Germany | Transfer Pricing


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