On January 25, 2017 a law proposal targeting harmful tax practices via the transfer of rights was published on the website of the German Ministry of Finance. Via the law proposal the German Government aims at combating profit shifting that takes place via the use of expenses incurred with respect to the use of intangible assets. In the law proposal the German Government proposes to limit the deductibility of royalties for German tax purposes if certain conditions are met.
In an introduction to the law proposal the German Government states that intangible assets like for example patents, licenses, concessions or trademarks can easily be transferred to another (international) legal entity. In the past this has led to an increase in countries that have entered into a tax competition with other countries by introducing special preferential regimes (so-called "IP boxes", "license boxes" or "patent boxes"), which to the extent that the preferential regime does not require a certain level of business activity for the preferential regime to apply is classified as harmful by the OECD.
In the final report on BEPS Action 5 (Counter harmful tax practices more effectively, taking into account transparency and substance) of the OECD and the G20, the participating states have agreed that the substantial activity requirement used to assess preferential regimes should be strengthened in order to realign the taxation of profits with the substantial activities that generate them (the so-called “nexus approach”). According to the German Ministry of Finance it can however not be ruled out that countries will continue to compete with other countries by applying preferential regimes that do not meet the nexus approach. Since a large number of German double taxation agreements do not allow the Source State to withhold withholding taxes over royalty payments (including DTAs concluded with non-OECD countries that therefore are not bound to the nexus approach), it would be possible for multinational companies to continue to shift profits to countries that continue to have a preferential IP regime that does not meet the nexus approach.
The law proposal is intended to restrict the deductibility of royalties and other payments made to related parties for the use of intangible assets that are not or low taxed (less than 25%) at the level of the recipient because of the applicability of an IP-regime that classifies as harmful (read does not meet the nexus approach). In order to prevent avoidance behaviour, the regulations also applies to structures making use of intermediate companies. If the conditions of the regulations of the law proposal are met, the height of the amount of non-deductible expenses is depending on the income taxes raised at the level of the recipient. The lower the tax burden is at the level of the recipient, the higher the non-deductible portion of the expenses is at the level of the German payer. By doing so the German Government aims at ensuring an appropriate taxation of royalties by following the principle of corresponding taxation. For arranging this, the law proposal contains the following formula for calculating the non-deductible part of the royalty payments (if the conditions for the restriction of deductibility to apply are met):
25% - Taxation via (corporate) income taxes in %
Click here to be forwarded to the text of the law proposal as available on the website of the German Ministry of Finance.
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