License barrier in Germany as from 2018 – Consequences for Switzerland
As from January 1, 2018, the new law limiting royalty deductions (so-called license barrier) will take effect in Germany – directly impacting international corporate structures and licensors in Switzerland.
Who is affected by the license barrier?
The license barrier refers to license fees paid to related parties (i.e. at least 25% participation, possibility of controlling influence, self-interest in regards to realization of profits by the contracting party, etc.), provided that (i) the licensor is domiciled in a country with so-called preferential arrangements and (ii) the license revenues are low-taxed (i.e. at a rate of less than 25%) in the country of destination. The license barrier does not apply, however, if the low taxation in the hands of the licensor is in line with the patent boxes defined by the OECD within the frame of the BEPS project (which do not yet exist in Switzerland, but are to be introduced by means of the tax proposal 17). The patent boxes generally provide that the taxpayers may only benefit from tax privileges granted on license revenues, if they have borne the bulk of the research and development costs
associated with the patent in question themselves.
Furthermore, it seems likely that the license barrier is only applicable to license payments and thus does not affect intellectual property rights.
What is the legal consequence of the license barrier?
The license barrier causes a proportional limitation on the tax deductibility of paid, and as expenses reported license fees, at the German company (licensee). The non-tax-deductible part is calculated by the following formula: