Germany: Countering harmful tax practices in licensing of rights

Germany: Countering harmful tax practices

Germany’s federal cabinet on 25 January 2017 published a ministerial draft bill that is intended to counter “harmful tax practices” in connection with the licensing of rights.

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Overview of proposal

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.

What’s next?

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:

  • Current developments in legislation and with respect to income tax treaties
  • A referral to the Court of Justice of the European Union (CJEU) from the Lower Tax Court of Cologne concerning the anti-treaty / anti-directive shopping provision
  • A referral to the CJEU rom the Lower Tax Court of Münster concerning the reduction of trade income by foreign dividend income
  • A German Federal Tax Court decision that rent paid by a special-purpose company involved in arranging trade fairs for the temporary use of exhibition space in trade fair exhibition halls is not subject to the trade tax add-back
  • Lower Tax Court of Cologne decision that losses that have not been used are forfeited upon the joint acquisition of more than 50% of the shares in a corporation by a trustee and a trustor
  • Lower Tax Court of Bremen decision that the non-deductibility of business expenses is not generally applicable to dividend payments after application of CFC rules.
  • Federal Ministry of Finance guidance on the consequences of the adjustment of the discounting of pension provisions for tax group recognition

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