Clifford Chance

Germany intends to restrict tax-deductibility of licence payments to IP boxes

5 May 2017

Action point 5 of the OECD BEPS report (2015) deals with preferential tax regimes for IP assets. Preferential tax regimes for IP assets are, in principle, accepted by the OECD as IP drives economic development and thus there is sound reason for jurisdictions to incentivise such activities through providing for preferential tax regimes. Accordingly, OECD takes the view that benefitting from preferential IP tax regimes (e.g. IP boxes) is legitimate provided the IP is the result of a substantial economic activity undertaken by the party claiming the tax benefits (so-called "nexus" approach of the OECD). Currently, most IP tax regimes are indifferent whether the IP is a result of substantial economic activities undertaken by the licensing entity itself. Therefore, most IP tax regimes need to be redesigned. As from mid 2021 they have to comply with the OECD requirements. Germany will not wait until 2021 and has recently proposed new legislation to end exploitation of non-OECD compliant IP tax regimes to the detriment of the German revenue. The new rule proposed denies tax-deductibility of licence fees to the extent the licensor has not actively created and developed the licensed IP ("Nexus Test") and is subject to an effective tax rate of less than 25% with its licence fee income under a preferential IP tax regime.

Download PDF