A law that aims to limit the attractiveness of “license box” companies was announced on June 24, 2017, and came into force on June 25, 2017 (Gesetz zur Bekämpfung der Steuerumgehung und zur Änderung weiterer steuerlicher Vorschriften [Steuerumgehungsbekämpfungsgesetz – StUmgBG]).
At present, multinationals are frequently taking advantage of “license boxes” (also referred to as patent boxes or IP boxes) outside Germany. These license boxes are regularly used for preferential tax treatment in foreign countries (particularly in Malta, the Netherlands, Belgium, and Switzerland) on profits generated from the exploitation of patents, licenses, concessions, and trademark rights. The German company then pays royalties to the foreign patent box company for the use of the rights held abroad. These royalties are subsequently deducted as operating expenses in Germany, which creates a tax advantage over the years. The bill will introduce a “license barrier” in Germany, which is set to apply to some 650 companies. Expected tax revenues amount to no less than EUR 900 million.
According to the bill, intra-group expenses for patents, licenses, concessions, and trademark rights will no longer be tax deductible in Germany as of next year if those payments are tax free or subject to a low tax rate at the beneficiary abroad. The bill states: “Taxes are to be owed to the State in which the activity on which value creation is based takes place, and not to the State offering the highest tax incentives.” The new statutory provisions are based on an action plan in line with the Organisation for Economic Co-operation and Development’s approach against harmful tax competition among states.
The only exception to the limitations on tax deductions will be allowed by the “nexus” approach: Accordingly, the use of license or patent boxes continues to be permitted where the company benefitting from tax incentives actively engaged in developing the relevant IP. This does not apply, for example, where the right has been acquired, developed by related entities, or obtained by the granting of trademark rights.
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© 2017 International Trademark Association