The license barrier limits the operating expense deduction for license expenses from January 1, 2018. Such operating expenses should no longer be deductible for certain international corporate structures. As a result: a higher tax profit and a higher tax burden. In order to secure operating expenditure, appropriate measures should be taken in advance.

In the video, we explain to you how corporations shift their profits to low-tax countries by granting licenses and thereby save considerable taxes.

1.Requirements for the license barrier

If the new § 4j EStG applies, the operating expenses for the entrepreneur are not tax deductible. We have described the harmful conditions for this below. You can view the legal wording here.

Requirement 1: License income is taxed abroad by a so-called license box (IP box)

So-called license boxes are regularly offered abroad. In such license boxes, license income is subject to a particularly low tax rate. This is usually 80 percent lower than the usual tax rate. Companies based abroad can use these boxes and low-tax license income. If license fees are paid out of Germany, they have a tax-reducing effect.

Legislators want to avoid low taxation in combination with tax-reducing operating expenses. The use of a license box abroad by the licensor can therefore trigger the license barrier for the licensee.

Requirement 2: License income is subject to low taxation abroad (more than 25 %)

Low taxation abroad is considered harmful by the German legislature. Low taxation is mentioned when the tax burden is less than 25%.

2.3 Requirement 3: Payment to a related party/company abroad

If licence payments are made abroad to a related party or company, this is also an indication that the licence barrier applies. A related party is any person or company that holds more than 25% of the shares. In cases where licensees and licensors are at least 25 % involved, the licensing barrier may be applied.

If licence payments are made to a third party to which there is no significant participation, the licence barrier usually does not apply.

The licensing barrier means that licensing payments can be deducted only partially or in some cases not at all as operating expenses. The amount of the deductible part of the license expenses is determined by the tax burden of the licensor abroad. If the foreign tax burden is close to 25%, only a small percentage may not be deducted as operating expenses. If the tax burden abroad is close to zero, the operating expenses are almost 100% excluded from the deduction.

4. avoidance strategies

4.1. Reduction of the level of participation

If there is no significant participation between the licensee and the licensor (minimum 25 %), the license expenses are fully allowed to deduct. We are happy to help you create a suitable corporate structure.

4.2. Use of a (legal) nexus-compliant license box abroad

Some license boxes have been classified by the EU as harmless or nexus compliant. Where such a box is used, the licence barrier should not exclude the deduction of operating expenses for licences. We are happy to check for you whether an IP box is also taxable for you.