On January 25, 2017, the German cabinet has resolved on a law bill dubbed "license barrier" as a reaction to the BEPS initiative.

If the bill passes parliament, it will mean that – in principle – tax relief will be restricted for royalties for the use of IP paid to intra-group entities, if the royalties are submitted to "preferential taxation" in the jurisdiction of the licensor.

Preferential taxation is considered given if the taxation of royalties (i) is lower than standard taxation of business income ("patent boxes", etc.) (ii) is below 25 % and (iii) does not require corresponding substantive business activity of the licensor (such as own research and development activities and related expenses). 

Under these circumstances, tax relief for royalties would – irrespective of any protection under double taxation conventions – be restricted on the level of a taxpayer liable to German tax to the extent the applicable tax rate falls short of a 25 % tax burden in the country of residence of the licensor.

The law bill also applies to back-to-back scenarios. A back-to-back is a scenario in which the licensor has itself licensed in the IP the use of which it provides to the German taxpayer.

According to the cabinet, after having passed parliament, the license barrier shall apply to royalties accruing from 2018 on. Conclusion of the legislative procedure is currently expected for summer 2017.

In light of this development, affected multinational companies with German entities or permanent establishments that are IP licensees should follow the ongoing legislation process in Germany and familiarize themselves with the prospective legislative adjustments. The current law bill may leave room for structuring mitigating the issue. We will monitor the further progress of the legislation procedure.