Tax Deductibility of License Fee Payments under German Tax Law – The License Barrier Rule Pursuant to Sec. 4j of the German Income Tax Act

Example:…

Licensor L, resident in country A, incurs expenses of 100 for its own R&D of a patent. L has to pay 20 on contract research conducted by an unrelated third party. Further, L acquires patents for 80. From licensing the patents to B, resident in Germany, L generates income of 300, which is taxed at a low and preferential rate. Under the OECD Nexus Approach, L’s total expenses of 200 breaks down into 120 on qualified R&D expenses, and 80 on other expenses. Therefore, 60% (120/200) of its license income is attributable to a substantial business activity. L can legitimately receive a tax privilege of 180 (300 x 60%) in country A under the Nexus Approach.…