7. Juli 2018
Christoph Niederer, VISCHER AG

License barrier in Germany as from 2018 – Consequences for Switzerland

As from January 1, 2018, the new law limiting royalty deductions (so-called license barrier) will take effect in Germany – directly impacting international corporate structures and licensors in Switzerland.
Who is affected by the license barrier?
The license barrier refers to license fees paid to related parties (i.e. at least 25% participation, possibility of controlling influence, self-interest in regards to realization of profits by the contracting party, etc.), provided that (i) the licensor is domiciled in a country with so-called preferential arrangements and (ii) the license revenues are low-taxed (i.e. at a rate of less than 25%) in the country of destination. The license barrier does not apply, however, if the low taxation in the hands of the licensor is in line with the patent boxes defined by the OECD within the frame of the BEPS project (which do not yet exist in Switzerland, but are to be introduced by means of the tax proposal 17). The patent boxes generally provide that the taxpayers may only benefit from tax privileges granted on license revenues, if they have borne the bulk of the research and development costs associated with the patent in question themselves.
Furthermore, it seems likely that the license barrier is only applicable to license payments and thus does not affect intellectual property rights.
What is the legal consequence of the license barrier?
The license barrier causes a proportional limitation on the tax deductibility of paid, and as expenses reported license fees, at the German company (licensee). The non-tax-deductible part is calculated by the following formula:
25% – profit tax burden at the licensor in % / 25%
What is the importance of the license barrier from a Swiss point of view?

The German license barrier will in all likelihood be applicable to the current Cantonal tax regimes (holding companies, management companies, mixed companies, incl. license box in the Canton of Nidwalden). In other words, license payments made by German-based companies (licensees) to Swiss licensors, which still have privileged tax status as of January 1, 2018, will be only partially tax deductible (e.g. at the rate of 32% in the case of license fees paid to Swiss holding companies). Existing IP corporate structures are therefore advised to investigate the potential effects of the license barrier on their cash flows as of January 1, 2018 and, where necessary, to adapt them and to consider a waiver of current tax privileges.