Every international group must ensure that its Group companies have a wide variety of services at their disposal. These services may be of an administrative, technical or commercial nature. As a rule, the parent company or one or more group companies specifically designated for this purpose bear the costs for the corresponding services. In the following, we explain which services can be billed within an international group. This is relevant because transfer pricing in the offsetting of intra-group services has a clear impact on the group’s taxation.

1st Transfer pricing for intra-group services – Introduction

If a German group company receives services from a foreign group company, the financial administration in most cases audits the services booked as operating expenses. In doing so, you first conduct an examination of the deductibility of the expenses “in terms of reason”. Once a deductibility is reasonably applicable, a “height” test is performed.

2nd transfer pricing to services: operating expense deduction

According to § 4 (4) EStG, operating expenses are expenses caused by the operation. An operational initiation is given if the expenses are objectively related to the operation and subjectively serve the operation. The objective relationship exists when the operation is the triggering moment for the expenditure. The subjective connection is regularly given when the expenses are intended to serve the business according to the assessment of the taxable person. The amount of the expenses, their necessity, customaryness and expediency are in principle irrelevant for the recognition as operating expenses.

Tax-optimized transfer prices for services: the advantage test

In a next step, the question of whether the service confers an economic or commercial advantage on the group company receiving the services that strengthens or secures its business position requires an examination. In this context, it is first assessed whether, in similar circumstances, an independent undertaking would have been willing to remunerate that activity if it had been carried out by an independent undertaking or whether it would have carried out that activity in-house as an own contribution. If this question does not receive a positive answer, it can be assumed that the transaction between third parties would hardly have come about. This makes it unusual. Payment for this service would thus be initiated under company law rather than operational law. Consequently, according to § 4 (4) EStG, no deduction may take place as operating expenses.

Settlement of intra-group services: illicit cost estimates

Only some services provided in the international group are accountable. In particular, the following services are excluded from offsetting:

4.1. Shareholder activities

Shareholder expense is the expense incurred as a result of the activity or performance of an undertaking of the multinational group of undertakings resulting from the status or obligations of a shareholding or investment. This includes in particular the following activities or services: