New Patent Box Blocker Rule in Germany

The German Government has recently adopted a new tax rule, the so-called Patent Box Blocker Rule. This rule disallows the partial or full deductibility of royalties paid by German affiliates to foreign intercompany licensors under certain conditions from 2018 onwards. What does this mean in practice? For example, if you are receiving a royalty of EUR 1 m from a German affiliate which is effectively taxed with a 10% tax rate on the level of the patent box owner, you will have to pay an additional EUR 150,000 in income taxes in Germany  due to a partially non-deductible royalty. Accordingly, the royalty is finally taxed at an overall tax rate of 25%.

The new German rule focuses on royalty payments that are taxed at a lower tax rate than the statutory tax rate in the country of the licensor. Especially patent boxes and trademark royalties are on the radar of the German tax authorities.

In the future, German affiliates must declare all royalties paid to foreign affiliates and provide documentation proving that the licensor is complying – partially or fully – with the German requirements for the deductibility of royalty payments.

In practice, the foreign licensor or patent box owner must check its R&D and trademark organization at the start of 2018. It is expected that several groups need to reorganize their R&D activities in order to guarantee the full tax deductibility of royalties paid by German affiliates. Furthermore, according to German requirements, they must establish and provide documentation every year from 2018 onwards.

If you want to know whether your group falls under the new German rules and if yes, what you need to do, please contact us or Christoph Kromer directly at (c.kromer@quanteraglobal.com).