On 25 January, the German cabinet passed, with minor amendments, a draft law that would limit tax deductions for cross-border royalty payments made to related companies.
As discussed in detail in my earlier article, under the proposal, first advanced by the finance ministry in December 2016, the German tax deduction for such royalty payments would be denied beginning 2018 if the corresponding income abroad is taxed under a preferential tax regime, such as a patent box regime, at a tax rate of less than 25 percent.
The restriction on deductibility, however, would not apply where the preferential tax regime requires real research and development activity to qualify for the tax subsidy, namely, if it applies the OECD/G20-approved “nexus approach.”
Only payments between related parties within the meaning of section 1 (2) of the German Foreign Transaction Tax Act (AStG) would be affected.
The legislative process is expected to be concluded by summer 2017, before the Bundestag election. The law still must pass parliament (Bundestag) and the federal assembly (Bundesrat).
The parliament’s tax committee will hold a hearing on the proposal in March, after which some changes could follow.
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