The German Ministry of Finance recently published a draft “act against harmful tax practices in connection with the licensing of intellectual property rights” dated December 19, 2016 (“License Barrier Act”). The act intends to create a “License Barrier” to limit the tax deductibility of cross-border license fees incurred by a German tax-resident licensee for the right to use intellectual property (“IP”) if (i) the corresponding licensing income is subject to a low tax rate in the hands of an affiliated licensor due to the application of a preferential IP tax regime and (ii) such tax regime is deemed inappropriate. (In principle, the distinction between “appropriate” and “inappropriate” IP tax regimes will be based on the “nexus approach” described in OECD BEPS Action 5.)

Scope of License Barrier

The License Barrier will be implemented by introducing a new Section 4j into the German Income Tax Act (“ITA”) and will apply irrespective of whether a pertinent double tax treaty exists.

Pursuant to Sec. 4j ITA, expenses incurred for the right to use IP may not be fully deducted from the income tax base if (i) the corresponding licensing income is taxed in the hands of an affiliated licensor (or, in case of sublicensing or similar arrangements, an affiliated upper-tier creditor) at a rate lower than 25 percent and (ii) this low tax rate is not the standard tax rate applicable in the respective jurisdiction but results from a preferential tax regime (e.g., from a so-called “IP, patent or license box”). To determine whether the effective tax rate is lower than 25 percent, all relevant tax provisions that have an impact on the taxation of the licensing income have to be considered. This includes tax reductions, exemptions, credits and relief. If the licensing income is partly attributed to or taxed in the hands of a person other than the licensor, the aggregate sum of the tax burden needs to be determined.

The percentage of the non-deductible license fees is to be determined using the following formula:

25% minus the effective tax rate applicable to the licensing income

The License Barrier will only apply between related parties (within the meaning of Sec. 1 para. 2 of the German Foreign Tax Act). The “related party” definition also includes permanent establishments acting as licensor or licensee. License fee payments between unrelated parties will not be affected. Furthermore, the License Barrier will only apply if the relevant preferential tax regime does not qualify as “nexus-based.” “Nexus-based,” in terms of the License Barrier Act, refers to IP regimes whose benefits are limited to IP rights that are based on a substantial economic activity. The relevant test is failed if the licensor has not developed the vast majority of the relevant IP right in the course of its own business activity (e.g., if the licensor has merely acquired the IP or the IP was developed by related parties). The nexus-based exemption from the License Barrier will not be available for trademarks.


It is expected that the German Federal Cabinet will decide on January 25, 2017, whether the legislative process will be moved forward on the basis of the draft License Barrier Act. If Sec. 4j ITA is implemented, it will affect the tax deductibility of expenses incurred after December 31, 2017.

Moreover, it should be noted that similar regulations affecting domestic IP tax havens might be introduced into the German Trade Tax Act. A resolution of the German Federal Council dated December 16, 2016, addresses German domestic license fee arrangements that are used to shift taxable profits to municipalities with a low trade tax rate. The German Federal Council takes the view that within Germany profits also should be taxed where they are economically generated and calls upon the German Federal Government to submit a legislative proposal against the aforementioned tax structures that take advantage of divergent municipal trade tax rates. It is still unclear if and when the requested anti-avoidance measures will be implemented.