Germany: Legislation incorporating authorized OECD approach to PEs not an independent rule for determining PE profit (Federal Fiscal Court decision)
Transfer pricing insights that may affect businesses in Germany
The Federal Fiscal Court (BFH) clarified in two decisions in December 2024 (cases I R 45/22 and I R 49/23) that Section 1 (5) of the Foreign Tax Act (AStG), which incorporates the authorized OECD approach (AOA) in applying the arm's length principle to cross-border dealings between a head office and its permanent establishment (PE), serves solely as an income correction provision, and not as an independent rule for determining the profits of PE.
The BFH held that the profit determination of a domestic dependent PE cannot be rejected solely based on AStG Section 1 (5), nor can a reallocation of profits be undertaken. Rather, income correction is only warranted if it is found that non-arm's length prices have been agreed upon, resulting in a reduction of the PE's income. In the case at hand, the BFH found no evidence of such non-arm’s length dealings or income reduction, and thus rejected the tax authority’s application of fictitious markups.
Read an August 2025 report* prepared by the KPMG member firm in Germany that discusses the ongoing ambiguities around application of AStG Section 1 (5).
*This report is one in a series prepared by the KPMG member firm in Germany. Read more on “German Transfer Pricing Insights,” covering transfer pricing topics that may affect businesses in Germany.