In the context of German transfer pricing documentation regulations, the so-called extraordinary business transaction (“EBT”) is usually overlooked. Nevertheless, the documentation of EBTs is subject to strict and special treatment by German lawmakers due to the potential to shift significant profits out of Germany via EBTs (e.g. the transfer of functions) and thus often constitute a pitfall in German tax audits.
Unlike regular transfer pricing documentation for ordinary transactions, EBTs require proactive and contemporaneous documentation within six months following the fiscal year in which the transaction occurred. The new transfer pricing regulations that came into force on 1 January 2025 make the already strict rules even stricter by introducing a requirement for proactive submission (i.e. previously upon request, the submission period now begins as soon as the tax audit notification is received).This article delves into the essentials of documenting EBTs, highlighting the importance of compliance and the implications of recent regulatory changes.
Understanding extraordinary business transactions
The term extraordinary business transaction, or EBT, is an undefined legal term in German tax law. In general, EBTs need to be seen as the opposite of so-called ordinary business transactions and therefore deviate significantly from the normal course of business, often resulting in substantial changes in income. The following circumstances can be considered extraordinary transactions under German tax law:
- The conclusion and modification of a long-term agreement that significantly affects the taxpayer’s income from the intra-group business relationships (e.g. tax audits often regard long-term loan agreements to be covered by this definition).
- Asset transfers as part of business restructuring measures.
- The transfer and provision of assets in connection with significant changes in functions and risks within the company (e.g. transfer of functions or business restructurings).
- Business transactions related to a significant change in business strategy relevant to transfer pricing.
- The conclusion of cost allocation agreements.
As stated above the most frequent case of an EBT is the (cross-border) transfer of functions within a multinational group resulting in significant operational changes (e.g. the transfer of a production function for certain products out of Germany).
Recap: documentation requirements up to 2024
The German legislator always applied stricter standards to the documentation of EBTs than to the documentation of ordinary business transactions. Ordinary transfer pricing documentation could be prepared and submitted within 60 days of a request from the tax authority (“TA”) (old legislation until 2024). Extraordinary transfer pricing documentation had to be prepared proactively and contemporaneously, i.e. within six months following the end of the fiscal year in which the extraordinary transaction occurred and submitted within 30 days of a request from the TA. Example: if an EBT occurred in 2023, the documentation needed to be prepared by June 2024 (i.e. financial year ending December). The flaw of this stricter law was that it was questionable how the TA could verify whether the EBT documentation was prepared in a timely manner as long as it was submitted within 30 days of the request.
However, we have increasingly observed in the recent past that tax audits attempted to reclassify such documentation as unusable if it had not been prepared within these time limits and then to reassess income while simultaneously shifting the burden of proof to the taxpayer. In these cases, the question arose as to what might be considered timely documentation (e.g. old project documents etc.) and to what extent it could be argued that (partially) late documentation had no influence on its reliability in a specific case.
Documentation requirements as of 2025
Significant new regulations for transfer pricing compliance came into effect in Germany as of 1 January 2025 that introduced changes such as a shortened submission period of 30 days for extraordinary and ordinary transfer pricing documentation (i.e. local file including a newly introduced transaction matrix and master file. Read more: TaxNewsFlash - Transfer pricing documentation). The TA may also request transfer pricing documentation (ordinary and extraordinary) at any time (previously, usually only during tax audits). A brief summary of the changes to the rules governing documentation submission for EBTs and ordinary transactions can be found in the table below:
Not only was the submission period on request shortened (only for ordinary transfer pricing documentation), but a mandatory submission requirement during tax audits was also introduced for the first time. From 1 January 2025, extraordinary transfer pricing documentation must be submitted within 30 days of the receipt of a tax audit notification. It is important to note that the tax audit notification does not need to explicitly include the request for ordinary or extraordinary transfer pricing documentation. The new submission deadline applies to transfer pricing documentation for all “open” fiscal years before 1 January 2025 if a tax audit notification for the relevant documentation period is issued after 31 December 2024.
Conclusion and key considerations
The new and partially shortened submission periods (and especially the proactive submission requirement) pose significant challenges for preparing sufficient extraordinary and ordinary documentation at short notice. In particular, international operating groups with restructuring activities (shifting functions out of Germany) and/ or business links to Germany are therefore strongly advised to update their transfer pricing documentation in the coming months. We therefore recommend reassessing the transfer pricing documentation strategy for German companies for FY2025 and beyond.
If you had any extraordinary business transactions in 2024, we recommend preparing the documentation by 30 June 2025 in order to comply with German law and to be well prepared for future tax audits.
Our KPMG Transfer Pricing Experts would be pleased to assist you with any questions you may have.
Publishing date:
27.03.2025