Transfer Pricing for Shareholder Expenses and Management Services

Adrian Kirsch, MOORE STEPHENS Treuhand Kurpfalz GmbH

In international corporate groups, globalization and the high mobility of goods, capital and work have resulted in a situation in which various services are provided by the domestic parent company on behalf of the individual subsidiaries, or by Group management companies.

These corporate groups are often structured along the lines of corporate functions such as marketing and production, rather than along national boundaries or following a legal corporate structure. Certain functions are outsourced by the operating companies to a centralized unit (intra-Group outsourcing). These “headquarters” companies have the following tasks, e.g.:

• monitoring management of the subsidiaries in the interests of the Group parent company;
• coordinating research and development and know-how transfers;
• providing consulting activities, e.g. in connection with procurement, human resources and financial planning, as well as providing technical or legal assistance;
• performing tasks in connection with accounting, reporting, controlling and internal auditing.

Typically, with such supervisory and coordinating functions, the focus is less on the aspect of control and the outsourcing of profitable activities abroad than it is on certain cost and synergy effects.

The individual services have to be broken down into categories in order to ascertain whether they can be charged to the recipients. This breakdown distinguishes between services which are provided in furtherance of a shareholder function and those which are provided in the interests or for the benefit of other Group companies.

Insofar as the management services and other activities serve the shareholder’s interests primarily, their costs are generally to be borne by the shareholder itself. These services have their legal basis in corporate relations and generally cannot be charged to the subsidiaries. This includes e.g. Group support (legal, financial and organizational benefits arising solely from membership in the corporate group, including the right to use the group’s name), monitoring of the subsidiaries’ management and tasks relating to Group accounting and reporting.

On the other hand, coordination and consulting services may, as a general rule, be charged to the recipients of those services.

Such a breakdown is also necessary if the aforementioned services are provided by a Group service company. If this service company performs activities in the interests of the Group parent company which arise from that company’s legal position, the services in question are to be charged to the Group parent company. If the service company provides coordination and consulting services for other Group companies, these services may, as a general rule, be charged to the recipient of those services.

In both cases, the cost plus method is generally applicable as the transfer pricing method. For example, a mark-up on accruing costs of between 5% and 10% is selected in each individual case, taking into account the functional and risk profile. If a Group service company also performs activities for the Group parent company, it may charge a mark-up for the services it provides to the Group parent company as well.