There has been an extremely controversial move away from the previously customary single-asset-based definition of transfer prices in favour of the so-called transfer package, as a commercially determined total price for a function relocated abroad. This development is substantiated by the regulations governing the transfer of functions (FVerlV) and the Administrative Principles set out in a lengthy document from the Federal Ministry of Finance.

Relocation of a function takes place if a transferring company transfers to a related accepting company, or permits the latter to use, assets and other benefits, and also the associated risks and opportunities. Essentially, the accepting company must be able to perform a function which was previously already performed by the transferring company, and performance of the function must cease at the transferring company. Pure functional duplication is not seen as function relocation.

In the meantime, the effects of the new legal provisions are being felt in tax audits. In the case of companies with parent companies/subsidiaries abroad, the focus is on possible relocations of functions, and these are subject to special scrutiny by the tax authorities. Before moving any kind of operational functions or sub-functions to foreign companies, it is important to consult with us and subject this decision to a comprehensive review in light of the applicable legal requirements and the existing administrative instructions on this, in order to avoid any unpleasant surprises further down the line. We also analyse for you the repercussions in the foreign country of the accepting company. The key here is to comply with any restrictions existing at country level when claiming for payments at the place of the function relocation as a deductible operating expense.