Intercompany services: common risks and measures to avoid them in Germany and Mexico.
In our experience, one of the most recurring issues in tax audits in both Mexico and Germany is the discussion with the tax authorities regarding the deductibility of expenses for services between related companies. This discussion is particularly complicated in the case of services known as "management fees" or general support services for the economic activities of the recipient entity.
Our experience is aligned with the recent publication by the OECD of the Public Consultation on Taxation: Revisions to Chapter VII of the OECD Transfer Pricing Guidelines, which emphasises the focus on the Benefit Test of the services. This suggests that this will continue to be a topic of discussion in future transfer pricing tax audits.
In this regard, the tax authorities consider that expenses for services between related companies will only be deductible in cases where the company can demonstrate the following:
- They have actually been provided;
- An independent third party would be willing to pay remuneration for this service, or an independent third party would provide the service as an internal service within its own company.
In other words, if the so-called benefit test is passed.
How can I demonstrate that the services received by my company pass the benefit test in Germany and Mexico?
The following table shows the compliance requirements in Germany and Mexico, as well as the relevant differences that need to be taken into consideration between them:
| Topic / Requirement | Common (Germany & Mexico) | Germany – emphasis / differences | Mexico – emphasis / differences |
| Benefit / need for the service | There must be an identifiable economic /commercial benefit for the recipient; if there is no benefit, it is not deductible. | Benefit test (OECD Chapter VII): the service improves or maintains the recipient's position. | Indispensability of the expense for the activity; The Mexican Tax Administration Service (SAT) requires materiality (proof that it was provided and served the national entity). |
| Shareholder services | Not deductible. | Express exclusion as a shareholder activity. | Rejection for non-indispensability / lack of materiality. |
| Duplication of services | Not deductible if they duplicate internal or third-party functions. | Specific control of duplication; prove that there is no overlap. | Same logic via materiality and necessity. |
| Incidental benefits | Not deductible for those who only receive collateral effects. | Emphasises that purely incidental benefits are not a service. | They are considered non-essential. |
| Centralised services | Deductible if effectively made available and directly beneficial to each entity. | Admission with evidence entity by entity. | Requires periodic reports / deliverables by MX entity. |
| Arm's length / market price | Remuneration aligned with market value. | Would a third party pay it? Economic consistency of the position. | Comparability analysis and annual adjustment if necessary to align with the range. |
| Intragroup contracts | Must be clear and specific (purpose, scope, pricing / costing methodology, drivers, SLAs). | Avoid vague clauses; precision of purpose. | Materiality and indispensability basis; useful for reporting purposes. |
| Operational evidence of the service provision | Reports, minutes, deliverables, activity logs. | Following the BFH XI R 15/23 ruling, emails and digital files are part of the required archive. | SAT criteria: proof of effective provision per period (materiality). |
| Economic evidence | Demonstrate economic impact or real need (e.g., IT support). | Proof of the relation between the service and the profit generated or expected by the recipient. | Link to income generation / retention in MX. |
| Apportionments / allocation keys | Accepted with objective and auditable drivers (hours, users, tickets, revenue, headcount). | Need proof of the reasonabilty of the allocation keys and its correct implementation during the period. | Rejection of portions / allocation keys without benefit to MX; unsubstantiated global apportionments ⇒ not deductible. |
| Specific TP documentation | Keep files and supporting documentation available to the authorities. | GAufzV/§90 AO: TP documentation. | Art. 76, 179, 180 MITL; Local file / Master file / CbCR where applicable; Assessment report assessing the materially of the services provided. |
| Annual TP adjustment | Possible to align with the arm's lenght principle. | Recomended to include the possible adjustment in the agreement. | Reconciliation and adjustment at closing to match arm's length. |
| Possibility of avoiding double taxation by adjustments to the intercompany services charged by the local tax authorities (MAP) | Via double taxation agreements and MAP . | Correlative in accordance with AstG / OECD; active use of MAP. | Correlative via treaties and MAP; support with TP study. |
| Low value adding services (OECD) | Both recognise the OECD concept. | The OECD approach is usually accepted if documented (cost + reduced margin). | No legal safe harbour; analysis (cost + margin) and comparability required. |
| Withholdings / source of wealth | Applied in accordance with local rules/treaties; proof of provision from abroad required. | No withholding tax is generally required to be applied to intercompany services received. | Withholding where applicable; document without Permanent Establishment (PE) in MX; residence and treaty support. |
| Payments to preferential regimes | — | — | Payments to Preferential Tax Regime (PTR) are not deductible (unless there is very specific evidence to the contrary). |
| Penalties for insufficient documentation | Fines for lack of / defective documentation; burden of proof on the taxpayer. | Strong emphasis: documentary non-compliance and failure to produce relevant emails / files. | Fines for insufficient information / materiality; rejection of expenditure if the service is not proven. |
| Document retention | Complete, traceable and consistent filing. | Long retention period and focus on digital evidence (including emails). | File by service and period; typical retention period of 5 years ( Federal Fiscal Code). |
Conclusion:
To avoid disputes over the deductibility of costs for intercompany services, it is essential to maintain a clear transfer pricing policy and subsequent documentation demonstrating the benefit to the receiving company. Important tips are:
- To define the time / resources allocated to the recipient entity, especially the subsidiary in Mexico.
- Avoid contradictions with the Master file / internal company documents.
Therefore, processes, documentation and files must be adapted to ensure tax deductibility and reduce risks during inspections. Mitigating risks such as lack of materiality, unverifiable apportionments, duplicate services and out-of-range margins require clear documentation, monthly traceability and proactive verification of market ranges. Likewise, it is essential to keep the consistency between contracts, reports and pricing methodology for deduction recognition.
This article was written in co-operation with L.C.P.F. Rodrigo Mendoza Romano and L.C.P.F Luis Arturo Trigos of CLA Mexico.
L.C.P.F. Rodrigo Mendoza Romano is the partner responsible for transfer pricing at CLA Mexico. He is an expert in international tax consulting and transfer pricing and has more than 17 years of experience in this field. He specializes in the design and implementation of intercompany policies for multinational corporations with operations in Mexico, the United States, Europe, Asia and Latin America.
L.C.P.F. Luis Arturo Trigos is an expert in transfer pricing in Mexico and Latin America and has more than eleven years of experience in this field. He performs valuations on intangible assets and corporate restructurings in the context of transfer pricing according to OECD guidelines.