License barrier as of January 2018: Limited tax deductibility for cross license or royalty payments to foreign related parties

Published on 3rd May 2017

Germany will introduce “license barrier rules” as of January 2018. The new rules will limit the tax deductibility of license fees or royalty payments to foreign related parties that benefit from preferential regimes (“Patent Box”, “IP-Box”, “License Box”) which are incompatible with the “OECD nexus approach” (“unqualified preferential regimes”) (sec. 4j German Income Tax Act).


Intangibles, such as patents, licenses, concessions or trademarks can easily be shifted from one country to another. In the past, this has resulted in harmful tax competition via preferential tax regimes for intellectual property (“IP”). In its BEPS (Base Erosion and Profit Shifting) project the OECD has tackled such preferential tax regimes and the states have agreed on allowing preferential tax regimes for IP if and to the extent the regime makes its benefits conditional on the extent of research and development activities of taxpayers receiving benefits (so called “nexus approach”).

For current regimes that are not in line with the nexus approach the OECD has acknowledged a “grandfathering period” until the end of June 2021. With the license barrier rules coming already into effect as of January 2018, Germany basically undermines the “unpleasant” grandfathering period.

Scope of taxpayers caught

The new rules will only apply to payments made to a recipient that qualifies as a related party of the licensee. License fees to third parties will not be caught. The term “related party” refers to situations in which (i) a person owns a direct or indirect participation of at least 25% in another person, (ii) a person can exercise a dominating influence over another person, or (iii) a third person owns a direct or indirect participation of at least 25% in both relevant parties.

In order to prevent any work-around schemes the new legislation also catches the interposition of related party intermediaries. Consequently, the license barrier rules will apply to payments of a German licensee if the payments are routed through a recipient towards another related party which benefits from an unqualified preferential regime. Furthermore, permanent establishments are included as potential payers or recipients of license fees / royalties in terms of the new regulation if they qualify as the respective beneficial owner for income tax purposes.


The restriction will only apply, if the license income is subject to an effective taxation of less than 25%.

Where license income is taxed at a tax rate of less than 25%, the deduction of the license fee is denied in proportion to the shortfall of taxation. As a result, if the income is not taxed at all, the full amount of the license fee will not be tax deductible. If, e.g. the tax rate amounts to 5%, 20% will be tax deductible.


The new rules provide for exceptions in which the license fees will still be deductible in full even though they are subject to a preferential tax regime at the level of the licensor.

  • General low-tax regimes

An exception applies to tax regimes that not specifically address income from IP, but which are generally preferential in the sense that they tax all income at a rate below 25%. Whether this exception will remain in force in the future is questionable, in particular if it turns out that, as a result, the licence barrier rules will run to nothing.

  • Qualified preferential tax regime

Moreover, the restrictions with regard to tax deductibility will not apply if the low taxation of license fees / royalties in the country of the recipient is resulting from a preferential regime which requires that the recipient has developed the respective intellectual property in line with the OECD nexus approach. As a result, “BEPS-conform” preferential tax regimes, i.e. regimes that are in line with the prerequisites outlined in Chapter 4 of the OECD Final Report on BEPS Action 5, will generally not be affected.


Taxpayers should in any case analyse their structures. This requires a review of the activities of the licensor with view to the development of the licensed IP as well as a verification of the compatibility of any used preferential tax regime with the nexus approach of the OECD. In particular an analysis is crucial if the licensor is located in a country that has been identified by the Final OECD Report on Action 5 as having preferential tax regimes incompatible with the nexus approach. Such countries include: Belgium, France, Hungary, Italy, Luxembourg, Netherlands, Portugal, Spain, UK, Switzerland (cf. Table 6.1 of Chapter 6 also the OECD final report on Action 5).

The same holds true if license fees relate to trademarks or similar rights. According to the view of the OECD, these rights can never qualify for tax benefits under regimes which comply with the nexus approach.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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