“Royalty Restrictions“ in Germany

11 July 2017

Germany has recently introduced new rules that will restrict the tax deductibility of related-party cross-border royalty payments if these payments are benefiting from a low taxation triggered by a harmful preferential tax regime in the country of the recipient.

Based on these new rules, such royalty expenses incurred after 31 December 2017 will no longer be fully deductible in Germany if the relevant income is subject to an effective tax rate of less than 25%:

In detail

For example, if the royalty income is subject to a preferential 10% effective tax rate, 60% of the royalty payments would not be deductible at the German taxpayer level.

However, if a recipient of cross-border royalty payments is subject to the regular tax rate (i.e. no preferential tax regime applies), the royalty restriction rule is not applicable, even if the effective tax rate is less than 25%.

Furthermore, patent box regimes which comply with the OECD “nexus” approach (i.e. under foreign law the preferential tax rate is only granted following an OECD-compliant “nexus” approach) are exempt from the new rule. A patent box of this kind is likely to be introduced in Switzerland in the context of tax package 17 (former corporate tax reform III).

It should however be noted that tax package 17 and therefore an
OECD-compliant Swiss patent box will probably not be introduced before 2020. Consequently, German royalty payments incurred between 1 January 2018 and the introduction of such a patent box in Switzerland could be subject to the new German royalty restriction rule if such royalties benefit from a Swiss preferential tax regime. The following regimes in Switzerland should be investigated in particular to establish whether or not they qualify as harmful preferential tax regimes:

  • Nidwalden IP Box
  • Mixed companies
  • Holding companies
  • Principal companies

An investigation into the impact of the new German limitation rules is recommended in order to determine their impact and to decide whether restructuring should be conducted before 1 January 2018.

In summary, there is still some uncertainty about how the new rules will be interpreted and applied. However, for now it can be assumed that all Swiss preferential regimes may potentially cause issues under the German royalty restriction rule.

There are, however, certain planning ideas which can help mitigate and/or reduce such issues. These solutions may depend on the very specific circumstances of your group and we advise you to have them analysed by your PwC tax consultant on a case-by-case basis.

For a more detailed discussion of how this might affect your business, please contact:

Armin Marti
Partner, Leader Corporate Tax
Tel. +41 58 792 43 43
armin.marti@ch.pwc.com

Stefan Schmid
Partner, Tax & Legal
+41 58 792 44 82
stefan.schmid@ch.pwc.com

Roman Brunner
Partner, Tax & Legal
+41 58 792 72 66
roman.brunner@ch.pwc.com

Urs Brügger
Partner, Tax & Legal
+41 58 792 45 10
urs.bruegger@ch.pwc.com

Reto Inauen
Senior Manager, Tax & Legal
+41 58 792 42 16
reto.inauen@ch.pwc.com

Published by

Stefan Schmid

Stefan Schmid
Partner, Tax & Legal Services
PwC
Birchstrasse 160
Postfach, 8050 Zürich
Tel. +41 58 792 44 82

Stefan Schmid is a corporate tax partner assisting companies in international tax matters, with a special focus on US, Asian and Swiss quoted groups. He graduated at the University of St. Gallen in Business Administration (lic.oec. HSG).

He has over 20 years of experience in assisting multinational groups in their international tax matters. He further gained extensive experience in assisting groups that operate centralised business models.