Germany: Expiry of transitional period for cost contribution agreements

​published on 20. November 2019

On July 5, 2018 the German Federal Ministry of Finance (BMF) published a letter stating that for FY beginning after December 31, 2018, the updated Chapter VIII of the OECD Transfer Pricing Guidelines 2017 on cost contribution agreements is to be applied in Germany.

If cross-border intra-group cost contribution agreements were concluded before the publication of this letter, a transitional period until December 31, 2019 still applies. Thereafter, the new regulations must also be applied to these agreements.

In this context, a cost contribution agreement between affiliated companies based solely on the costs incurred will only be applicable in exceptional cases in the future. Instead, the participants´contributions must be valued at arm´s length and remunerated on the basis of the expected benefits. In addition to the question of the valuation of individual contributions, an examination of the prerequisites for participation also comes to the fore. A company can only be a participant in a cost contribution if, among other things, it has control over risks assumed by it as part of the cost contribution agreement and has the financial capacity to assume the risks. If a company cannot exercise these control functions and if it does not have sufficient financial capacity to bear the risk realisation, this company cannot in principle be a participant in the cost contribution agreement.

Therefore, companies should review their existing cost contribution agreements before end of the year and, if necessary, take appropriate measures to meet the new regulations in Germany.