A draft German bill may impact the deductibility of royalty payments in Germany paid to companies benefitting from IP regimes, including the ‘old’ Patent Box rules.
The German Government has published a draft bill intended to counter harmful tax practices in connection with the licensing of rights. The draft bill would restrict the tax deductibility of royalty expenses and other expenses for the licensing of rights that are not taxed or only taxed at a low rate on the part of the recipient due to certain preferential regimes (such as patent boxes, IP boxes and similar). The explanatory notes to the bill define these regimes as ‘harmful’ if they do not tie in with the substantial activity of the taxpayer receiving benefits. Regimes that follow the ‘nexus approach’, where taxpayers are granted benefits only to the extent that the expenditure on the creation of the IP is incurred in the country, are not considered harmful. The ‘old’ Patent Box rules and businesses receiving royalties under the transitional (‘grandfathering’) provisions will be caught.
The planned restriction would include expenditure on the licensing of use or the right to use rights, in particular copyrights and industrial property rights, commercial, technical, scientific and similar experiences, knowledge and skills, and will be limited to payments between related persons. The royalty income must also be subject to a low tax rate (less than 25 percent) in the hands of the recipient.
If the requirements for a restricted deduction of royalty expenses are met, royalty payments from Germany to other territories will suffer a disallowance to the extent the receipt suffers ‘low taxation’. This would apply to payments due after 31 December 2017. As an exception, a full deduction will be permitted if the preferential regime requires a substantial activity in the recipient territory, meaning royalties benefitting from the ‘new’ Patent Box rules will not be caught.
In the UK, this may impact UK companies receiving royalties from Germany which benefit from the so-called ‘old rules’ for Patent Box. If the bill is introduced in its current form, these companies will need to disallow 60 percent of the royalty payment for German tax purposes.
If you have any questions, or would like to discuss the impact of the new rules on your business, then please get in touch with your usual KPMG contact.
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