The Federal Ministry of Finance recently approved a draft bill on the limitation of the deduction of royalties on 25 January 2017. The bill focused on foreign IP boxes incompatible with the OECD nexus approach, and to make their use unattractive.
The new bill offers for a limitation of the deductibility of royalties paid by a German corporation or permanent establishment to a foreign related party or to its head office, respectively.
According to the Bill, the limitation of royalty deduction applies, when:
license income is subject to preferential, low taxation, meaning taxation below 25%; and where such low taxation does not require substantial business activities of the licensor, substantial business activity being in particular development activities with own resources.
The new bill also, principally limits the deduction of royalties on intellectual property acquired by the licensor or developed for the licensor by related contract developers. In case license payments relate to trademarks, the deduction of license payments is limited regardless of whether using the foreign IP box requires substantial business activities or not. Where license income is taxed at a tax rate of less than 25%, the deduction of corresponding license charges is denied in proportion to the under taxation.
The new rules shall apply for all license charges paid or accrued after 31 December 2017.