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Publication:

Transfer pricing in the supervisory board

18 December 2020

Dr. Arwed Crüger , Partner, International Tax Services
Transfer Pricing
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ARUG II entered into force

The Act implementing the Second Shareholders’ Rights Directive (ARUG II) entered into force on 1 January 2020, based on the EU directive 2017/828 of 17 May 2017. Certain transactions of listed companies with related parties require the approval of the supervisory board (Aufsichtsrat) and publication.

RELEVANCE OF TRANSFER PRICES FOR THE SUPERVISORY BOARD

There are many sides to the issue of transfer pricing. Usually, tax compliance is in the foreground, especially when a tax audit is pending. However, the importance of transfer prices for management reporting or the setting of internal group performance incentives should not be underestimated.

But transfer prices can also play an important role for the supervisory board of a publicly listed company, for example in the case of a dependency report. This report has to be prepared by the management board and verified by the supervisory board. Material transactions with related parties even require approval, i.e. the supervisory board has to explicitly approve these transactions in advance.

Both regulations ultimately have the same goal: to protect shareholders from economically disadvantageous transactions. The supervisory board in turn shall be strengthened in its controlling role.

THE RULES OF ARUG II IN DETAIL

Under certain circumstances, transactions with related parties by a listed company required the approval of the supervisory board already before ARUG II. Previously, the threshold for transaction requiring approval was 2.5% of the sum of fixed and current assets according to the last approved annual financial statements of the company or (in the case of parent companies) of the respective group of companies. This threshold for the reservation of approval is now reduced to 1.5% by ARUG II. 

The term “related party” is defined in a new provision, and some cases are exempted from the requirement of approval. This relates, for example, to transactions with wholly owned subsidiaries.

INTERNAL PROCEDURE NECESSARY

Exempted from prior approval are transactions that are conducted in the ordinary course of business and at arm’s length. The existence of these conditions must be verified in an internal procedure that the related parties involved in the transaction are excluded from. This may require the involvement of external experts.

REGULAR MARKET CONDITIONS AND APPLICATION OF THE ARM’S LENGTH PRINCIPLE

The existence of regular market conditions can be demonstrated, for example, by an arm’s length test. By applying a recognized transfer pricing method, such as the comparable uncontrolled price method, the marketability can be demonstrated. Written procedural documentation is also recommended.

OBLIGATION TO PUBLISH

The company is obliged to publish details of transactions requiring approval without delay in an easily accessible manner. The information has to also be made publicly accessible on the company’s website for at least 5 years. The new regulations apply to financial years beginning on or after 1 January 2020.

NEED FOR ACTION

For listed companies, the possible effects on their own business procedures need to be examined. The necessary measures should be implemented without delay, as they already apply to certain transactions in 2020. Such measures are the identification, examination, approval, and publication of affected transactions, but also the establishment of the internal procedure.

EFFECTIVE SUPPORT BY BDO

Please feel free to contact your BDO contact person for a quick check to identify a possible need for action. We would be happy to support you in any necessary adjustments to your internal processes or transfer pricing system. If necessary, we will call on colleagues from other specialist areas, for example to review or adjust compliance structures and IT systems or integrate IT tools. If necessary, we will work together with colleagues from the respective BDO Member Firms from our international network in more than 167 countries.