At present, the determination of transfer prices in international groups is to be carried out on the basis of the functions, risks and assets taken over. Therefore, a functional and risk analysis must first be carried out in order to classify the participating companies as “strategy promoters/entrepreneurs” or “routine companies”. In the following, we therefore want to describe the tax consequences of a characterisation as a strategy promoter/entrepreneur in connection with international transfer pricing.

1. Transfer pricing and policymakers – introduction

As part of the functional and risk analysis, the Group companies must analyse which functions they perform, which risks they bear and which tangible and intangible assets they use (Section 1(3), second sentence, AStG). The purpose of this analysis is therefore to determine which companies in the Group can be characterized as so-called routine or strategy carrier companies. For this purpose, a functional and risk analysis is usually structured as follows:

Operational functions of a strategy leader

– Research & Development

– Manufacturing/Services

– Sales & Marketing / Customer Service

– Purchasing & Logistics

Non-operational functions of the strategy promoter

Management and Administration

Economic goods

Ownership of tangible assets

Ownership of intangible assets

Risks of a strategy promoter

– Developmental error risk

— Asset loss risk

Cost and price fluctuation risk

— Utilisation risk

Risk of loss of production

– Product liability and guarantees

Financing risk

– Storage risk (depreciation & loss)

Currency risk

Transport risk

– Misguided strategy

Based on the functional and risk analysis carried out on the approach to international transfer pricing, it is now decided whether group companies should be characterised as so-called “routine companies” or as so-called “strategic operators” or “entrepreneurs”.

A strategy promoter/entrepreneur is therefore an entity which, as a result of a functional and risk analysis of the transaction, performs the essential functions, uses the essential tangible assets and intangible assets and assumes the material risks, either alone or together with other related parties. (Administrative Principles Transfer Pricing 2024, Appendix 2).

2. Transfer pricing: tax consequences of classification as a strategy promoter

The strategy leader should therefore receive the so-called group residual result after the routine companies have been adequately remunerated for tax purposes. Since he is the “decision maker” in the international group, he bears the opportunities (profits) and risks (losses).

In addition, strategy makers are usually not the companies considered in the context of a transfer pricing audit. Rather, “tested party” is the routine company, as it is the least complex and thus comparable in the context of a comparison with other companies.

3. Transfer pricing and policy makers: the hybrid company

By the way, until 2021, the financial administration took the view that there was a third category in addition to the division into routine companies and strategy leaders/entrepreneurs. This was the so-called medium-sized or hybrid company (management principles transfer pricing 2005, paragraph 3.4.10.2). However, the so-called hybrid company was a German single-handed company, as it existed neither in the OECD guidelines nor in the UN manuals at transfer prices. However, according to the literature, the hybrid company was a helpful description for an autonomous company that did not have the essential intangible values in the value chain, but instead licensed them (see Busch, DB 2021, 1908-1912).

Since the hybrid company is not further discussed in the BMF letters administrative principles transfer pricing from 2021, which cancel the old BMF letters, a characterization of a company can only be carried out in routine companies or strategy leaders or entrepreneurs.

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