The recent ruling by the German BFH (Bundesfinanzhof – Federal Fiscal Court) marks a turning point in Transfer Pricing interpretation, addressing a complex situation: The indirect benefit received by the company from local marketing activities without explicit consideration.
Background
A German subsidiary of a pharmaceutical group acted as a limited-risk distributor, i.e., it had restricted functions, assumed few risks, and operated under controlled pricing policies. Conversely, its marketing activities in Germany also benefited parallel importers—third parties who purchased the same product in other EU countries at a lower price and resold it in Germany.
The BFH concluded that even if this indirect benefit was not foreseen or contractually agreed upon, it could be a hidden profit distribution (Verdeckte Gewinnausschüttung or VGA) if an independent third party would demand compensation for such an effect. Consequently, it determined that the subsidiary should have received additional remuneration for this profit that benefited its parent company or the group.
Ruling Key Points
- Economic recognition without contractual control: It is irrelevant that the subsidiary had not authorized the parallel imports but whether there was a benefit to the group without consideration.
- Market value assessment: It is necessary to analyze how an independent party would act under similar conditions.
- Suggested remuneration model: The BFH proposed a scheme based on a percentage of the sales team’s remuneration, weighted by the volume of parallel imports, plus a margin for functions assumed.
Why Should Latin America Care?
Although this decision is under German jurisdiction, it sets a precedent that could influence future audits or case law in other regions. In countries such as Peru, where Transfer Pricing audits have become more sophisticated, this approach could encourage the tax administration to review whether local activities benefit other entities economically in the group without adequate compensation.
Sources: Alvarez & Marsal / Bundesfinanzhof