Intercompany charges and management fees: when the German subsidiary can deduct them

International groups use management fees and intercompany charges (Konzernumlagen) to allocate the costs of central functions to their companies: finance, IT, human resources, legal, purchasing. The costs of managing the group itself are not part of this. For the German subsidiary, these charges are often substantial, and they are scrutinised accordingly in a tax audit (Betriebsprüfung). They are recognised if the service was actually rendered, the German company needed it and the price corresponds to what unrelated third parties would have agreed.

The German company must be able to show which specific services it has received. General descriptions such as ‘management support’ are not sufficient. The decisive question is whether a prudent and diligent business manager (ordentlicher und gewissenhafter Geschäftsleiter) would also have obtained the service from an unrelated provider or performed it in-house (the benefit test); the company does not have to prove that the service was economically successful. Services that the subsidiary already performs for itself and benefits that accrue to it solely from belonging to the group do not give rise to deductible expenses.

Costs that the parent company incurs in its role as shareholder (costs of shareholder activities) must not be passed on: the work of the management and supervisory boards, consolidated financial statements and consolidation, investor and capital market relations, and the management and control of shareholdings. These activities serve the interests of the shareholders, not the subsidiary’s operating business. In practice, it is not unusual for such costs to find their way into the cost allocations until the tax auditors ask about them.

Intra-group services are usually remunerated using the cost plus method (Kostenaufschlagsmethode): the costs incurred are allocated and a mark-up is added. Allocation keys such as revenue, headcount or intensity of use must fit the service in question and be verifiable. For low value-adding routine support services, such as bookkeeping, the tax authorities generally accept a mark-up of 5% if the group applies it uniformly; research and development, production and sales are excluded from this. Services that make a significant contribution to value justify higher mark-ups or other methods.

A written agreement concluded before the start of the service period makes it considerably easier to provide evidence. It should describe the services, remuneration and allocation keys and be applied in practice as written. Concluding a cost allocation agreement (Umlagevertrag) counts as an extraordinary transaction (außergewöhnlicher Geschäftsvorfall); under Section 90(4) of the German Fiscal Code (AO) and Section 3 of the Profit Allocation Documentation Ordinance (GAufzV), it must be documented promptly and submitted in a tax audit without being requested. For VAT purposes, the German company generally owes the tax itself on services from a group company resident abroad, under the reverse charge procedure of Section 13b of the German VAT Act (UStG); if it is entitled to full input VAT deduction, it deducts the same amount as input VAT at the same time.

Intercompany charges are legitimate and indispensable in many groups. Groups that set them up properly secure the deduction in Germany and avoid double taxation.