German limit on tax deduction for related-party royalty payments approved by cabinet

by Ninja-Antonia Reggelin

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.

Related MNE Tax articles:

Ninja-Antonia Reggelin

Ninja-Antonia Reggelin

Ninja-Antonia Reggelin is based in Berlin, where she is head of tax policy at a business association.

She previously worked at the OECD, contributing to the project that led to the publication of the BEPS Action Plan. Prior to that, she was with PwC Germany, where she focused on international tax structuring.

Ninja holds a Master’s degree (LL.M.) in International Trade Law from Bond University Australia and a Master’s degree (M.A.) in International Relations from the University of Kent Brussels School of International Studies.


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