German tax authorities and to provide tax auditors with guidance on the exami- nation of cross-border transactions. Compared to the 1994 U.S. Regulations and the 1995 OECD Guidelines, the German administrative principles are less com- prehensive, but these principles still provide the taxpayer with helpful guidance Though taxpayers follow the administrative principles in order to receive legal ertainty, they are binding on neither the taxpayer nor on the tax courts, but only on the tax administration Hidden Profit Distributions The most frequently used provision to adjust income in Germany is section, 8 paragraph 3, sentence 2, of the Corporation Tax Code. This provision determines that"hidden profit distributions(verdeckte Gewinnausschuittung) should not de- crease the income of a corporation. "Thus, section 8 of the Corporation Tax Code distinguishes between payments made based on contractual agreements and those based on the shareholder relationship. However, section 8 of the Corporation Tax Code does not provide for a definition or a further explanation. Instead, the tax courts have defined what is deemed to be a dividend by this provision. G Prudent Business Manager Standard. From an intemational tax per- spective, it would have been obvious to use the arm,'s length standard to evaluate whether the company would have agreed to the same conditions if it had dealt with unrelated parties. However, section 8 of the Corporation Tax Code historically fo- cused on domestic aspects. The courts developed the so-called prudent business manager standard, which is derived from German commercial law. Under this standard, an income adjustment is justified if a prudent business manager--in deal ing with a nonaffiliated person-would not have agreed to the conditions of the In the past, practitioners discussed whether the prudent business manager stan- dard is different from the arm's length principle. Practitioners argued that the pru- dent business manager standard is a one-sided approach, in that it focuses only on the question of whether the business manager of the corporation would have agreed to the conditions of the transaction. The question of whether the other party to the transaction would have adhered to such conditions was not considered Gii) Arms Length Criteria Distinguished. The prudent manager standard is very different from the arm's length principle, which ideally looks at both sides of a contract This difference in approach became obvious when the federal tax court ruled that a prudent business manager would not accept losses for more than 9See, for example, Federal Tax Court, February 2, 1989, BStB 1. II 1989, p 522; Federal Tax Court,December 1995,BStB1.m1996,p. iOSee, for example, Federal Tax Court, February 11, 1987, BStBl I 1987, p. 461; Lower Tax Court of Hessen October 17, 1988, EFG 1989, P. 200