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| Alexander Linn |
Thorsten Braun |
The German government decided on January 25 to introduce a
bill into the legislative process that would limit the
deductibility of royalty payments between related parties for
payments that become due after December 31 2017.
The bill is based on a draft law published by the federal
Ministry of Finance at the end of 2016.
The draft law addresses royalty payments that are subject to
a "low taxation" of the royalty income at the level of the
recipient due to the application of intellectual property
regimes such as IP, patent or license boxes. The law is
directed at beneficial "non-nexus"-based IP regimes. Low
taxation of royalty income based on the general taxation of the
recipient would not fall within the scope of the proposed
rules.
The restriction on deductibility would apply only to royalty
payments made between related parties. The draft law also
targets payments made to indirect recipients that benefit from
a preferential non-nexus-based IP regime resulting in low
taxation. This approach would result in the disallowance of
deductions in back-to-back royalty structures where only an
indirect recipient benefits from the regime.
Low taxation under the draft law generally means an
effective tax rate of less than 25%. The determination of
whether the income is low-taxed would be made in accordance
with the rules in the Foreign Tax Act.
However, low taxation would not automatically result in a
full disallowance of the deduction of the royalty payment. The
percentage of the disallowed payment would be calculated based
on the applicable tax benefit at the level of the recipient
(i.e. the difference between the applicable tax rate and a 25%
tax rate). For example, if the tax rate at the level of the
recipient is 10%, 60% of the royalty payment (which is 15/25%)
would be non-deductible for German tax purposes and if the
non-nexus based IP-regime provided for a 0% tax rate, the full
amount of the royalty payment would be non-deductible.
The draft law contains exceptions to the deduction
limitation for royalty payments made to subsidiaries of the
German licensee that trigger the German controlled foreign
company rules at the level of the subsidiary and for payments
regarding trademark rights based on the definition in the
Trademark Act.
"Nexus-based" preferential tax regimes that would fall
outside the scope of the proposed rule include regimes whose
benefits depend on a substantial economic activity (e.g.
R&D). The draft law provides that a substantial economic
activity would not exist where the recipient of the royalty
payment did not fully or predominantly develop the underlying
IP in its own business operations (e.g. if the IP was developed
by related parties or acquired).
The outcome of the legislative process is unclear. However,
because the draft law is supported by the governing coalition
at the federal level, chances that the draft law will be
enacted seem high.
Affected taxpayers should carefully monitor the legislative
process.
Alexander Linn (allinn@deloitte.de) and
Thorsten Braun (tbraun@deloitte.de)
Deloitte
Tel: +49 89 29036 8558 and +49 69 75695 6444
Website: www.deloitte.de