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In addition to the aforementioned regulations, section 1 of the External Tax Relations Act (Außensteuergesetz – AStG) is a legal basis for adjusting domestic income (regarding cross-border intra-group transactions). Sec. 1 AStG stipulates that, „if a taxpayer’s income from international business relations with a related party is reduced as a result of the taxpayer agreeing on terms, particularly prices (transfer prices), that diverge from those which independent third parties would have agreed upon under the same or similar circumstances (arm’s length principle), the taxpayer’s income must, without prejudice to other provisions, be corrected in such a way that it reflects terms that would have been agreed between unrelated third parties.”

Sec. 1 AStG is the only regulation in German tax law that explicitly refers to the ALP. If an income adjustment based on Sec. 1 AStG leads to a higher taxation than the hidden profit distribution and the hidden capital contribution, sec. 1 AStG is to be applied in this respect. An adjustment of income based on sec. 1 AStG requires related parties. Thus, the definition of the relationship between legally separate persons is stipulated in sec. 1 para. 2 AStG. Persons are related if one of the following criteria is met, whereas „person” stands for individuals or entities likewise:

i.

the person holds a direct or indirect share in the taxpayer amounting to at least one quarter (substantial participation) or may directly or indirectly exercise a controlling influence over the taxpayer or vice versa the taxpayer holds a substantial participation in the person or may exercise a direct or indirect controlling influence over this person; or

ii.	a third person has a substantial participation in both the person and the taxpayer or may exercise a direct or indirect controlling influence on both; or

iii.	the person or the taxpayer is able to exercise an influence extraneous to the business relationship over the taxpayer or the person when concluding the terms and conditions of a business relationship or if one of them has an own interest regarding the income generation of the other person.

Section 1 AStG applies to cross-border transactions between associated enterprises as well as to the income allocation between an enterprise and its foreign PE.

Several ordinances and Finance Ministry circulars provide detailed information about German legislation relating to transfer pricing issues. Translations of these documents can be found on the Website²⁾ of the German Federal Ministry of Finance. It should be emphasised that only the original documents in German language are authoritative for the application of the tax law.