By including a new provision to the income tax law, the draft bill is intended to 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 a preferential regime to be considered to be “harmful”—e.g., IP-box, patent box or license box regimes.
The proposal ties in with the OECD’s base erosion and profit shifting (BEPS) Action 5 that defines harmful preferential regimes for the licensing of rights—preferential regimes considered to be harmful if they do not tie in with the substantial activity of the taxpayer receiving the benefits. Regimes that are consistent with the “nexus approach” are considered to be harmless.
The scope of the application is limited to payments between related persons (in particular in situations when there are participating interests of at least 25%). Also, the creditor’s license income must be subject to a low tax rate (an income tax burden of less than 25%). The low taxation must also be based on a privilege for the income from the licensing of rights that deviates from the standard tax treatment.
As an exception, a full deduction would be allowed if the preferential tax regime requires a substantial activity in the recipient state. A substantial activity is not present if the creditor has not largely developed the right within the framework of its own business activity, in particular if the right has been purchased or developed by related persons. This exception, however, would not apply if the preferential regime favors income from the licensing of trademark rights.
The Bundesrat (upper house) may submit an opinion on the draft bill. The actions of the Bundestag (lower house) and of the Bundesrat then would follow. If the legislative process is completed in the first half of 2017, it is intended for the measures to be effective for expenses accruing after 31 December 2017.
Read a 2017 report [PDF 386 KB] prepared by the KPMG member firm in Germany
Other recent tax developments discussed in this KPMG report concern:
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