We for you in
News > Proposal for an EU Transfer Pricing Directive

Proposal for an EU Transfer Pricing Directive

News – 09.10.2023

The European Commission recently published a proposal for a Council Directive on Transfer Pricing on 12 September 2023. This proposal is part of the package known as ‘Business in Europe: Framework for Income Taxation’, or ‘BEFIT’ and includes the standardisation of key transfer pricing principles to be incorporated into EU law.

According to the European Commission, the proposal shall increase tax certainty and mitigate the risk of litigation and double taxation. The directive shall also further reduce the opportunities for companies to use transfer pricing for aggressive tax planning purposes.

Aims addressed by the proposed Directive

The proposed Transfer Pricing Directive lays down rules to ensure a common application of the arm’s length principle throughout the European Union with the aim of increasing tax certainty and reducing double taxation and double non-taxation. This shall be achieved through the following objectives:

  • Incorporating the arm’s length principle into Union law;
  • Harmonizing key transfer pricing rules;
  • Clarifying the role and status of the OECD Transfer Pricing Guidelines; and
  • Creating the possibility to establish, within the EU, common binding rules on specific transfer pricing subjects within the framework of the OECD Transfer Pricing Guidelines.

With regard to the proposed Directive, the following provisions are of particular interest:

Definition of associated enterprises

The proposed Directive provides a definition of an ‘associated enterprise’. For the purposes of this Directive, ‘associated enterprise’ means a person who is related to another person in any of the following ways:

  • Participation in the management of another person by being in a position to exercise a significant influence over the other person;
  • Participation in the control of another person through a holding that exceeds 25 % of the voting rights;
  • Participation in the capital of another person through a right of ownership that, directly or indirectly, exceeds 25 % of the capital;
  • is entitled to 25 % or more of the profits of another person.

In the case of indirect shareholdings, the 25 % threshold is determined by multiplying the percentage of the shareholding. However, a person holding more than 50 % of the voting rights shall be deemed to hold 100 % of the voting rights. The term ‘person’ in this provision shall include both legal persons and individuals.

Process of corresponding adjustments

In addition, the Directive proposes a uniform approach to corresponding adjustments. By definition, a corresponding adjustment is an adjustment to a company’s taxable profits made by the tax administration of a second jurisdiction as a result of a primary adjustment made by the tax administration of a first jurisdiction. The aim is to ensure that the allocation of profits between the two jurisdictions is consistent.

Within the framework of the proposed Directive, a pre-defined procedure for such adjustments is foreseen in order to avoid double taxation of profits. The corresponding adjustment depends on several conditions to be met:

  • the Member State that was requested to perform the corresponding adjustment agrees that the primary adjustment is consistent with the arm’s length principle both in principle and as regards the amount;
  • the primary adjustment results in the taxation of profits in another jurisdiction on which the associated enterprise in the Member State that was requested to perform the corresponding adjustment has already been subject to tax in such Member State;
  • where a third-country jurisdiction is involved, a tax treaty is in force to prevent economic double taxation.

A taxpayer whose transaction has been modified by a primary adjustment in another jurisdiction may request a corresponding adjustment. In this respect, the proposed Directive sets out the parameters of the taxpayer’s request, such as the indication of all factual and legal circumstances necessary to assess the primary adjustment. In addition, the proposed Directive ensures that the procedure for making such an adjustment is carried out within 180 days of receipt of the taxpayer’s request. However, if such an adjustment is not granted, the proposed Directive requires Member States to ensure that mutual agreement procedures remain available to taxpayers.

Performing year-end adjustments

The proposed Transfer Pricing Directive also sets out rules for compensating adjustments in the form of year-end adjustments initiated by the taxpayer. The relevant year-end adjustment will be accepted by Member States’ tax authorities if the following conditions are met:

  • before recording the relevant transaction, or series of transaction, the taxpayer made reasonable efforts to achieve an arm’s length outcome;
  • the taxpayer makes the adjustment symmetrically in the accounts in all Member States involved;
  • the taxpayer applies the same approach consistently over time;
  • the taxpayer makes the adjustment before filing the tax return;
  • the taxpayer is able to explain why its forecast did not match the result achieved.

Determination of the arm’s length range

In addition to the transfer pricing methods, which are identical to those in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, the proposed Directive includes a provision on how to determine the arm’s length transfer pricing range.

In cases where the application of transfer pricing methods results in a range of values, Member States shall ensure that the arm’s length range is determined by using the interquartile range of the results of the uncontrolled comparables. For the sake of clarity, a ‘controlled transaction’ is a transaction between two associated enterprises, whereas a ‘comparable uncontrolled transaction’ is a transaction between independent enterprises (so-called ‘uncontrolled comparables’) that is comparable to the controlled transaction (i.e. provision of management services) under examination.

This interquartile range is the range from the 25th to the 75th percentile of the results. With regard to the necessity for adjustments, the proposed Directive distinguishes between two cases:

  • In cases where the results fall within the arm’s length range, Member States shall ensure that a taxpayer is not subject to adjustments. There is, however, an exception where it is demonstrated that a specific departure from the range is justified by the facts and circumstances of the particular case.
  • In cases where the results fall outside the arm’s length range, an adjustment is made to the median of all the results. The median is the 50th percentile of the range of results of the comparable uncontrolled transactions.


The final decision on the adoption of the proposed Transfer Pricing Directive will be taken by the Council of the European Union.

After being adopted by the Council, the proposed Directive shall come into force as of 1 January 2026.


Let's get in touch!