On 25 January 2017, the German government approved a bill to combat harmful tax practices in connection with the assignment of rights. The aim is to stop multinational companies from using royalty payments to shift their profits to countries with special preferential regimes (known as patent box, license box or IP box regimes) that are not in line with the requirements developed by the BEPS project of the OECD and the G20. By rights, taxes should belong to the country where the activities underlying value creation occur, not to the country that offers the most attractive tax incentives.
Commenting on the federal cabinet’s decision, Finance Minister Wolfgang Schäuble stated:
We will no longer stand by while multinational corporations shift their royalty income to low-tax jurisdictions with no link to the underlying research activities. This bill is a further step towards implementing the agreements made in the BEPS project. It will stop companies from using patent boxes to shift profits purely for tax planning purposes. Countries that promote this type of profit-shifting cannot expect us to support these practices, which after all are harmful to us.
Under Action 5 of the BEPS project, a country may grant benefits through IP box regimes only to companies that conducted research and development activities in the country and incurred actual expenditure as a result (known as the nexus approach).
If a country engages in unfair tax competition by failing to meet this requirement, the provisions of the new law will apply: The deductibility of royalties as operating expenses in Germany will be restricted in cases where deduction would otherwise result in royalty income that is not taxed or taxed at a low rate (of less than 25%) in the recipient country because of a preferential regime that is classified as harmful.
IP box regimes that are classified as harmful must be eliminated or brought in line with the nexus approach by 30 June 2021 at the latest. The OECD’s final report also stipulates that new entrants that are not in line with the nexus approach are no longer permitted into existing preferential regimes as of 30 June 2016.
This rule helps to protect Germany’s tax revenue from an early stage. To ensure that those involved have sufficient time to adapt to the change, the new rule will be applied to expenditure incurred after 31 December 2017.