When an investor decides to carry out business activities in
Germany via a German subsidiary, the transactions between
the German corporation and its foreign affliates may give rise to
issues of how income should be allocated for tax purposes.
Based on the “separate entity concept”, the arm’s length
principle has become the accepted approach in dealing with in-
tra-group transactions on an international level. Prices as well as
terms and conditions agreed on for transactions between related
parties will be accepted for tax purposes only when the terms
and conditions of the transaction do not differ from those on
which unrelated parties would have agreed. The same approach
must be used to determine the acceptable level of profit mark-up
under cost-plus arrangements.
The inter-company prices agreed
on for the exchange of goods or services are referred to as trans-
fer prices (Verrechnungspreise).