Background
With the law against harmful tax practices in connection with the transfer of rights of 27 June 2017, the so-called licence barrier was introduced in sec. 4j of the German Income Tax Act (EStG). In accordance with sec. 4j, paragraph 3 EStG, this provision provides for a (pro rata) prohibition of deduction for expenses arising from the transfer of rights to related parties if the corresponding income is subject to a low preferential treatment by the creditor ("licence boxes" or "patent boxes"). However, if this preferential arrangement corresponds to the so-called "Nexus approach" of the OECD, the (partial) prohibition of deduction does not apply in this respect (sec. 4j paragraph 1 sentence 4 EStG).
Letter from the Federal Ministry of Finance dated 19.2.2020
In a letter dated 19 February 2020, the Federal Ministry of Finance (Bundesministerium der Finanzen / BMF) listed in a non-exhaustive overview internationally known preferential regulations which did not comply with the Nexus approach in the 2018 assessment period and which are to be regarded as harmful regulations under the licence barrier regulation.
Most of the preferential regulations listed in the BMF letter will expire by 2021 and will either be cancelled or replaced by Nexus-compliant regulations in the countries concerned. When changing to a Nexus-compliant regime, the OECD in its BEPS report provides for a grandfathering of non-Nexus-compliant old regulations until 30 June 2021. The BMF, on the other hand, clarifies in its letter that a corresponding grandfathering regulation is not provided for the application of sec. 4j EStG and therefore the still valid, but expiring non-Nexus-compliant regulations are to be regarded as harmful.
Individual non-Nexus-compliant regulations
The overview includes i.a. the following countries for 2018: Belgium, France, Greece, Italy, Liechtenstein, Luxembourg, Malta, the Netherlands, Portugal, parts of Switzerland, Spain, Turkey, Hungary, Cyprus and the United Kingdom.
A further overview lists preferential arrangements that have not yet been conclusively examined for 2018. The FDII regulation of the USA ("foreign derived intangible income") should be highlighted from this overview. In the case of payments taxed under these preferential arrangements, these cases are to be kept open in procedural terms and assessed subject to review until a final review has been carried out. Nevertheless, the licence fee is (for the time being) to be treated as a deductible business expense, unless there are reasons outside the licence barrier regulation that prevent deduction.
Consequence
From 2018, German companies that are part of an international group will have to perform a detailed tax analysis of royalty payments to foreign related parties (e.g. other group companies). The overview of the BMF is a working aid for this purpose and lists all harmful regulations identified by the tax authorities to date. Due to the parallel existence of different preferential arrangements in some countries, it must be examined in each individual case how and, if applicable, on the basis of which preferential arrangement a royalty payment was taxed at the creditor's premises.