On 23 May 2012, the German government adopted the Draft Annual Tax Law for 2013, with significant implications on the attribution of profits to permanent establishments (PEs). In essence, Germany will formally end the “Relevant Business Activity Approach” in favour of the OECD’s “Functionally Separate Entity Approach.” With this measure, the government is trying to move German transfer pricing of PEs from the extreme end of the spectrum of international conduct towards the international consensus. This is a major change to the current situation and if this draft is accepted by the parliament and senate it will mean a pronounced change to the treatment of existing and future PEs.

This article first appeared in the June 2012 issue of BNA’s Transfer Pricing International Journal.