EU Advocate General says Germany’s transfer pricing laws are compatible with EU law

The Advocate General of the Court of Justice of the European Union, Michal Bobek, on December 14, issued his opinion in an important case under consideration by the court, concluding that Germany’s transfer pricing legislation does not violate EU concepts of freedom of establishment.

Under the fact of the case, Hornbach-Baumarkt AG v Finanzamt Landau (C‑382/16), German private limited company Hornbach-Baumarkt AG (‘Hornbach’) provided comfort letters to banks and creditors to guarantee the liabilities of its Netherlands subsidiaries but did not receive any remuneration from the subsidiaries in exchange.

On audit, the German tax office concluded that the comfort letters had not been granted on an arm’s-length basis and increased Hornbach’s business tax to reflect the notional remuneration that it considered would normally have been paid to Hornbach by an unrelated third party.

Hornbach brought an action challenging the tax office’s assessment before the referring court, arguing that German transfer pricing legislation is contrary to freedom of establishment under EU law.

Hornbach contested the legislation on the grounds that it only allows the tax authority to make transfer pricing adjustments in cases where related foreign companies are involved and does not allow taxpayers to invoke justifications for transactions not carried out on arm’s-length terms. The court requested a preliminary ruling of the CJEU.

The Advocate General concluded that legislation does not constitute a restriction on the freedom of establishment after analyzing the alleged infringements under both the discrimination approach and the restriction approach.

Moreover, the Advocate General said that even if the legislation is an infringement, it is justified on the basis of the preservation of the balanced allocation of the powers of taxation between Member States, subject to the final assessment by the national court that the legislation does not go beyond what is necessary to achieve that aim.

The Advocate General said the court should also articulate whether the discrimination approach or the restriction approach applies, and said he favored the discrimination approach. If the court adopts the discrimination approach, the analysis should stop at the stage of comparability, he advised.