Germany limits tax deduction for royalty payments

Germany limits tax deduction for royalty payments


By: Katrin Gänsler

Today, the German Federal Council (Bundesrat) approved a bill introducing limitations on German tax deductions available in respect of royalty payments. The bill had been passed by the German Federal Parliament (Bundestag) on 27 April 2017. The new rules principally target payments to so-called “patent” or  “IP box”  entities whose preferential tax treatment in their jurisdiction of establishment are not in line with the OECD “nexus” approach (which, broadly, requires entities benefitting from tax incentives related to IP development to be actively engaged in the development of the relevant IP). The new rules are an example of Germany's implementation of Action 5 of the OECD's BEPS Action Plan (Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance).

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